
3L /f 00 



VALUE 



AND 

DISTRIBUTION 

AN 

HISTORICAL, CRITICAL, AND CONSTRUCTIVE STUDY 

IN 

ECONOMIC THEORY 

ADAPTED FOR ADVANCED AND POST-GRADUATE WORK 



BY 
CHARLES WILLIAM MACFARLANE, Ph.D. 



SECOND EDITION 



PHILADELPHIA 

J. B. LIPPINCOTT COMPANY 

IQOO 



Copyright, 1898, 

BY 

J. B. Lippincott Company. 
By 1 randier 

D. C. Public Library 
AUG 1 7 1934 



Electrotyped and Printed by J. B. Lippincott Company, Philadelphia, U.S.A. 



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TRANSFERRED FROM PUBLIC LIBRARY 



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THIS BOOK IS GRATEFULLY DEDICATED 
TO MY FRIEND AND FORMER PRECEPTOR 

DR, EUGEN VON PHILIPPOVICH 

PROFESSOR OF POLITICAL ECONOMY 
IN THE UNIVERSITY OF VIENNA 

WHO, WHILE IN NO WAY RESPONSIBLE 
FOR THE OPINIONS HEREIN EXPRESSED, 
MAY YET FIND IN THEM SOME REFLEC- 
TION OF HIS OWN CATHOLIC VIEW OF 
ECONOMIC PHENOMENA 



PREFACE. 



THE last quarter of the nineteenth century has 
witnessed more than one noteworthy advance 
in economic theory. Some of this work has been 
embodied in permanent form, as in the publications 
of the Austrian school of economists ; much of it, 
however, is scattered through various magazines and 
journals, and its importance is unrecognized because 
no effort has as yet been made to bring it together 
as a coherent whole. One of the purposes of the 
present volume is to give more permanent form to 
this scattered work and to bring it, as well as that 
of the Austrian economists, into some sort of co- 
relation with the work of the so-called orthodox 
school of economists. Again, it will be found that 
in the endeavor to give coherence to the work of 
previous writers certain concepts or theories are de- 
veloped that have not been clearly stated elsewhere, 
— concepts which more or less seriously modify the 
hitherto accepted views of value and distribution. 

The fact from which all studies of distribution 
must start is the price of commodities, and what we 
have to determine is how this price is divided among 
the several parties to the transaction. From this 
it follows that any adequate study of distribution 



VI 



PREFACE. 



must be prefaced by an examination of the phe- 
nomena of value and price. In keeping with this 
I have devoted the first part of the present volume 
to an attempt to answer the vexed question, What 
do we mean by value and price ? 

In the discussion of the problem of distribution, 
the question of the equity of the distribution has 
been consciously and purposely avoided. The im- 
portance of this phase of the subject cannot well be 
exaggerated ; but the laws according to which the 
social product is distributed should first be clearly 
defined before we attempt to determine whether or 
not this distribution is equitable. Nothing is gained 
either by confounding the two problems or by in- 
verting the order of the inquiry. In the present 
volume I shall strictly confine myself to the first 
of these problems, or to a purely theoretic study of 
the laws under which the several shares in distri- 
bution are determined. 

In the earlier days of the present investigation I 
regarded it strictly as a monograph, and addressed 
myself to those who are familiar with the whole 
range of economic theory. As the work progressed, 
however, it seemed that by some modifications and 
additions it might be made available for the ordinary 
advanced student or for those who had only been 
over the ground covered by the usual text-book. 
With this larger audience in mind, I was persuaded 
to adopt the topical form for the presentation of 
the subject. The shifting from one audience to 



PREFACE. vil 

another during the progress of the work has re- 
sulted in an unevenness which could only be elimi- 
nated by a careful rewriting of the entire book. 
The pressure of other interests renders this practi- 
cally impossible. 

In the desire to secure a clear and coherent view 
of a rather wide range of economic phenomena, I 
have been compelled to ignore many details whose 
discussion, though interesting and important, might 
confound the reader, or at least obscure his view of 
the main lines of the argument. Again, it may be 
that a greater wealth of illustrations would have 
helped rather than hindered the argument. If so, 
it is an omission which the intelligent teacher can 
readily supply. 

In conclusion, I have to thank Professor F. W. 
Speirs, of the Philadelphia Manual Training School ; 
Professor H. R. Seager, of the University of Penn- 
sylvania, and Professor John L. Stewart, of Lehigh 
University, for a careful reading of the manuscript 
and for valuable criticisms and suggestions. Again, 
I have especially to thank Professor H. C Whitaker, 
of the Philadelphia Manual Training School, who 
spent several weeks with me in a revision of the 
original manuscript, thus enabling me to see all 
parts of the argument through the eyes of another. 
It was at his suggestion that the topical form was 
adopted. This has undoubtedly added much to the 
clearness of the entire argument. 



CONTENTS. 



INTRODUCTION. 

PAGE 

A necessary relation exists between the economic theories and the 

economic phenomena of a time and people xix 

Contrast between the economic phenomena in England during the 

first and last quarters of the nineteenth century xx 

The corresponding change in economic theory is not yet complete . xxii 



PART I.-VALUE. 

CHAPTEE I. 

THE COST THEORY OF VALUE. 

I. THE EARLIER COST THEORY. 

1. Paradoxes of value explained by the Cost Theory 20 

2. Free goods eliminated from economic consideration 20 

3. Scarcity goods eliminated because of their rare occurrence ... 21 

4. The Law of Cost only applicable to freely reproducible goods . 21 

II. THE MARGINAL COST THEORY. 

5. The graphical representation of Marginal Cost Theory .... 22 

6. Eicardo's statement of the Marginal Cost Theory 23 

CHAPTER II. 

CONDITIONS UNDER "WHICH THE COST THEORY 

FAILS. 

I. THE CONTENTION OF THE AUSTRIAN ECONOMISTS. 

7. Exceptions admitted by Eicardo 25 

8. Additional exceptions 26 

II. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS 

FAILS. 

9. Marginal Cost Theory holds for products of better land, etc. . . 27 

10. Marginal Cost Theory holds for products of fixed capital ... 27 

III. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS 

MAY BE SUSTAINED. 

11. Patents, Tariffs, etc 28 

ix 



X CONTENTS. 

CHAPTER III. 
THE UTILITY THEORY OP VALUE. 

I. THE EARLIER UTILITY THEORY. 

PAGE 

12. The failure of the Earlier Utility Theory to explain the para- 

doxes of value 30 

II. THE MARGINAL UTILITY THEORY OF VALUE. 

13. Gossen and his work 32 

14. Jevons, Walras, and Menger 34 

15. Bohm-Bawerk's statement of the Theory of Marginal Utility . 35 

16. Graphic illustration of the Marginal Utility Theory 37 

(a) Value per Unit versus Total Value 38 

(b) Total Value versus Total Utility 38 

17. The Marginal Utility Theory and the paradoxes of value ... 39 

(a) Why are air and water valueless, and why is iron of less 

value than gold ? 39 

(6) "Why did the Dutch East India Company destroy a por- 
tion of their crops ? 40 

CHAPTEK IY. 

CONDITIONS UNDER "WHICH THE UTILITY THEORY 

FAILS. 

18. Bohm-Bawerk's admitted exceptions to the Law of Marginal 

Utility 43 

19. How Bohm-Bawerk would escape from the consequences of 

these admissions 45 

(a) The Elimination of the marginal pair of sellers ... 46 

(b) The Elimination of one of the two marginal buyers . . 47 

20. The defect in the analysis of the Austrian economists 48 

(a) The Marginal Utility Theory rests upon the unwar- 
ranted assumption of free competition among con- 
sumers 48 

(6) Marginal Utility Theory fails because the marginal 

consumer frequently secures a surplus 50 

CHAPTEK V. 
THE MONOPOLY THEORY OP PRICE. 

I. THE PRICE OF A SINGLE GOOD. 

21. Normal Value and Price 55 

22. Other conditions under which Marginal Utility determines Price 56 

23. The diagram of the Austrian economists 58 

24. Diagram of the Monopoly Theory of Price 58 

II. THE PRICE OF COMPLEMENTARY GOODS. 

25. The confusion in the Austrian treatment of complementary 

goods 60 

26. Complementary goods an ordinary case of scarcity price ... 61 



CONTENTS. XI 

CIAPTEE VI. 
VALUE AND PRICE. 

PAGE 

27. Subjective Exchange Value is not a primary phenomenon of 

value • 64 

28. Use and Exchange Value versus Value and Price 65 

CHAPTEE VII. 
COST AND PRICE. 

I. THE LAW OF COST AND THE PRICE OF FREELY REPRO- 
DUCIBLE GOODS. 

29. The Law of Cost is here an exact law 68 

30. Cost is here a direct cause of Value 69 

II. THE LAW OF COST AND THE PRICE OF SCARCITY GOODS. 

31. A substitute always possible 71 

32. The substitute is in last resort a freely reproducible good ... 73 



CHAPTER VIII. 

DISTRIBUTION AND THE THEORIES OP UTILITY, 
VALUE, AND PRICE. 

33. Society is interested in the increase of Total Utility 74 

34. The individual interested in the increase of Total Value .... 75 

35. Disadvantages of the orthodox attitude 77 

36. Advantages and disadvantages of the Austrian attitude .... 78 



RART II.— DISTRIBUTION. 

BOOK I.— RENT. 

CHAPTER I. 

THE RENT OP LAND. 

I. FUNDAMENTAL PROPOSITIONS. 

37. An Agrarian doctrine 83 

88. Rent does not enter into the determination of price 84 

39. Diagram of rent 85 

40. Eent due to difference in fertility and distance from market . . 87 

41. Law of Diminishing Eeturns 88 

42. Effect of Improvements 88 



Xll CONTENTS. 

II. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF RENT. 

PAGE 

43. Adam Smith 89 

44. Criticism of Smith 90 

45. Anderson 91 

46. Malthus 95 

47. West 96 

48. Ricardo 97 

49. Criticisms of Eicardo , , , , 99 

CHAPTEE II. 
THE GENERAL DOCTRINE OF RENT. 

I. THE DOCTRINE IN ENGLISH ECONOMICS. 

50. Whately on the General Doctrine of Eent 102 

51. J. S. Mill on the General Doctrine of Rent 103 

52. Walker on the Rent of entrepreneur 104 

53. Marshall on the Rent of capital 105 

54. Clark and Hobson on the General Doctrine of Rent 106 

II. THE DOCTRINE IN GERMAN ECONOMICS. 

55. Busch on the Rent of labor 107 

56. Hufeland on the General Doctrine of Rent . 108 

(a) Rent of land 108 

(6) Rent of capital 109 

(c) Rent of labor 109 

(d) Rent of unternehmer 109 

57. Mangoldt on the General Doctrine of Rent Ill 

(d\ Rent of land 112 

(b) Rent of capital 112 

(c) Rent of labor 113 

(d) Rent of unternehmer 114 

58. Schaffle on the General Doctrine of Rent 116 

59. The Austrians on the General Doctrine of Rent ,,,,... 117 

BOOK H— PROFIT. 

CHAPTEE I. 

PROFIT A PRICE-DETERMINING SURPLUS. 

I. RENT AND PROFIT AND THEIR POINTS OF DIFFERENCE. 

60. Rent an individual, Profit a group surplus 122 

61. Rent a differential, Profit a marginal surplus 122 

62. Rent a limited monopoly, Profit a monopoly surplus 123 

63. Rent a price-determined, Profit a price-determining surplus . . 124 

64. Competing differential concepts 126 

II. INTEREST AND PROFIT AND THEIR POINTS OF DIFFERENCE. 

65. Interest a normal, Profit a monopoly surplus 127 



CONTENTS. Xlll 

CHAPTEE II. 
PROFIT AND THE CONCEPT OF A NO-RENT LAND. 

PAGE 

66. Mill's admissions and their logical result 129 

67. Mill inadvertently includes a marginal surplus, or Profit under 

Kent 131 

68. Eent the differential surplus in a single industry . , 132 

69. Hobson's objections to this use of the term Kent 133 

70. Objections to Walker's use of the term Profit 135 

71. The suggested use of the terms Kent and Profit ..,,... 137 



BOOK IE— INTEREST. 

CHAPTEE I. 

EARLIER IDEAS IN REGARD TO INTEREST. 

I. USURY IN LESS DEVELOPED SOCIETIES ; INTEREST IN HIGHLY 

DEVELOPED SOCIETIES. 

72. Aristotle 139 

73. Calvin 140 

74. Locke 141 

II. INTEREST A RETURN FOR THE USE OF .WEALTH AND NOT FOR 

THE USE OF MONEY. 

75. Hume 141 

76. Adam Smith 143 

CHAPTEE II. 

THE EXPLOITATION THEORY OF INTEREST. 

77. The contention that the value of all goods is measured by quan- 

tity of labor 145 

(a) Ricardo and the case of scarcity goods 146 

(6) What labor is the standard of value? 149 

78. Contention that capital is not an original and independent source 

of value 152 

(a) Natural goods are sometimes original powers 152 

(b) Capital an independent power 153 

79. The contention that the whole product belongs in equity to the 

laborer 154 

CHAPTEE III. 

THE USE THEORY OF INTEREST. 

80. Menger's statement of the Theory 160 

81. Criticism of Menger's. statement 162 



XIV 



CONTENTS. 



CHAPTEE IV. 
THE EARLIER PRODUCTIVITY THEORY OP INTEREST. 

I CONTINENTAL WRITERS FAIL TO SEE THAT INCREASE IN 

PRODUCT DOES NOT NECESSARILY MEAN AN INCREASE IN 

VALUE. 

PAGE 

82. Say 16 * 

83. Eiedel 165 

II ENGLISH WRITERS SAW THAT INCREASE IN PRODUCT DOES 

NOT NECESSARILY MEAN AN INCREASE IN VALUE, BUT 
FAILED TO SUPPLY THE ELLIPSIS IN THE ARGUMENT. 

84. Lauderdale 168 

85. Malthus 170 

86. Ellipsis in the argument of the advocates of productivity ... 171 

III INCREASE IN PRODUCT IS NOT A NECESSARY CONDITION OF 

INTEREST. 

87. Bohm-Bawerk fails to recognize the cause of the confusion . . 171 



CHAPTER V. 

THE ABSTINENCE THEORY OP INTEREST. 

88. Senior's statement of the Theory 173 

89. Lasalle's philippic 175 

90. Bohm-Bawerk's contention 176 

91. Keply to Bohm-Bawerk 176 

92. Another objection to the Abstinence Theory 177 

93. Reply to this objection 179 

94. Still another objection to the Abstinence Theory 180 

CHAPTER VI. 

INTRODUCTION TO THE EXCHANGE THEORY OP 
INTEREST. 

95. Capital is concerned with time utilities 183 

96. The rationale of machine methods of production 186 

97. Machine production not a necessary condition of interest . . . 186 

98. The definition of capital 187 

99. Difficulties encountered by this definition 188 



CHAPTER VII. 
THE EXCHANGE THEORY OP INTEREST. 

I. PRESENT GOODS ARE WORTH MORE THAN FUTURE GOODS. 

100. Differences in provision and underestimate of the future . . . 192 

101. Roundabout methods of production 193 

102. Technical superiority of present goods 193 



CONTENTS. XV 



CHAPTER VIII. 

CRITICISM OF THE EXCHANGE THEORY OP 
INTEREST. 

I. ARE PRESENT GOODS WORTH MORE THAN FUTURE GOODS? 

PAGE 

103. Admitted exceptions to this contention 195 

104. Additional exceptions 196 

105. These exceptions are not fatal to the Exchange Theory of 

Interest 198 

II. ABSTINENCE IN THE EXCHANGE THEORY OF INTEREST. 

106. Interest measured hy marginal abstinence 200 

107. Abstinence recognized in the Exchange Theory 200 

(a) Difference in provision 200 

(6) Underestimate of the future 201 

III. IS THE TECHNICAL, SUPERIORITY OF PRESENT GOODS A 
NECESSARY CONDITION OF INTEREST? 

108. Technical superiority an increase in quantity of product . . . 202 

109. Defects in Bohm-Bawerk's reasoning 203 

(a) Technical superiority not an independent cause of 

value 204 

(5) The technical superiority of present goods does not 

necessarily result in an increase in value 206 

(c) Technical superiority of present goods is not an essen- 
tial condition of interest ,,,,,,,,.... 210 



CHAPTEE IX. 

THE MARGINAL PRODUCTIVITY THEORY OP 
INTEREST. 

I. COMPETING CONCEPTS OF CAPITAL. 

110. Capital as a sum of concrete commodities 214 

111. Capital as a mobile, homogeneous fund 214 

II. RATE OF INTEREST FIXED BY MARGINAL PRODUCTIVITY. 

112. Clark on the mobility of capital 217 



CHAPTEE X. 
THE NORMAL- VALUE THEORY OP INTEREST. 

I. INTEREST A PROBLEM IN NORMAL VALUE. 

113. The source of Bohm-Bawerk's error 223 

114. Bohm-Bawerk's confused recognition of the part played by 

abstinence 225 

115. Statement of the Normal- Value Theory 228 



Xvi CONTENTS. 

BOOK IV.— WAGES. 
CHAPTEE I. 

THE WAGES FUND DOCTRINE. 

I. THE EARLIER ADVOCATES OF THE THEORY. „,„,, 

116. Adam Smith 232 

117. James Mill 233 

118. Kicardo 233 

II. THE LATER ADVOCATES AND CRITICS OF THE THEORY. 

119. J. S. Mill's statement of the theory 235 

(a) Mill's contention that Trades Unions cannot increase 

wages 236 

120. Longe's criticism of Mill 237 

121. Thornton's theory of price and wages 238 

122. The importance of Thornton's theory of price not generally 

recognized 241 

123. One source of confusion in Thornton's discussion 244 

124. There is no fund set apart for the payment of wages 247 

125. Mill's reply to Thornton 250 

126. Wages are affected by the productivity of labor . 252 

127. Cairnes's attempt to rehabilitate the doctrine 253 

128. The element of truth in the Wages Fund Doctrine 254 

129. The source of the confusion ,,..,.,, 255 

CHAPTEE II. 

THE RESIDUAL CLAIMANT THEORY OF "WAGES. 

130. Profits the residual share according to the earlier economists . 256 

131. Cairnes's statement of the Kesidual Claimant Theory of Wages 257 

132. Walker's Kesidual Claimant Theory of Wages 258 

133. Criticism of Walker's theory 260 

CHAPTEE III. 
THE PRODUCTIVITY THEORY OF WAGES. 

I. THE GENERAL PRODUCTIVITY THEORY OF WAGES. 

134. Walker's contention 265 

II. MARGINAL PRODUCTIVITY THEORY OF WAGES. 

135. Concrete and abstract concepts of labor 267 

136. The abstract fund remains constant while concrete forms 

change 269 

137. The rate of wages determined by the marginal productivity of 

labor .,,,,,,,, , , , . . 270 



CONTENTS. xvil 



III. THE ELEMENT OF TRUTH IN THE WAGES FUND DOCTRINE. 

PAGE 

138. Capital constant, population increasing 271 

139. Population constant, capital increasing 272 

140. A certain best ratio of capital and labor 272 

141. Application to the Wages Fund Doctrine 273 

IV. OBJECTIONS TO THE MARGINAL PRODUCTIVITY THEORY. 

142. "What determines the margin of production ? What limits the 

supply of labor ? 274 



CHAPTEE IY. 
THE MALTHUSIAN THEORY OP "WAGES. 

I. THE EARLIER MALTHUSIAN THEORY OF WAGES. 

143. The pressure of population upon subsistence 276 

144. The function of misery and vice 277 

145. The standard of life 277 

146. The pressure not remote but immediate 278 

147. The issue between Malthus and Godwin 279 

II. THE LATER MALTHUSIAN THEORY OF WAGES AND THE CON- 
DITIONS OF PROGRESS. 

148. Virtue and intelligence as checks to population 281 

149. Increase of the food supply an essential condition of progress . 282 

150. Manufactures and an advancing standard of life 283 

151. Progress depends on the supply of capital as well as on the 

supply of land 284 

152. Malthus's changed view of society 287 

153. The unfair treatment of Malthus , , 288 



CHAPTEE Y. 
THE NORMAL VALUE THEORY OP "WAGES. 

I. THE GAIN AND ABSTINENCE OF LABOR. 

154. Clark's failure to recognize the abstinence of labor 291 

155. Patten on the abstinence of labor 293 

156. Clark's restatement of Patten's contention 294 

II. A NORMAL VALUE OR AN EXCHANGE THEORY OF WAGES. 

157. The time utilities of labor 297 

158. The exchange by the laborer of present for future goods . . . 299 

159. Confusion in Patten's use of the terms cost and surplus . . . 299 

160. The modification of Patten's diagram 302 

161. The Normal Value Theory only applies to normal conditions 

in a progressing society 302 

162. Failure to secure this gain due to loss of mobility , 304 



XV111 CONTENTS. 

KESUME. 

I. VALUE. 

PAGE 

163. The Cost Theory and its failure 305 

164. The Utility Theory and its failure 305 

165. Price determined between limits 306 

166. Cost and price 306 

II. DISTRIBUTION. 

167. Kent 307 

168. Profit 308 

169. Interest 309 

170. Wages 310 

171. Factors of production versus different forms of surplus .... 312 

172. An essentially different scheme of distribution from that pro- 

posed by Clark 316 



INTRODUCTION. 



It has frequently been remarked that there is a 
necessary correspondence between the economic theo- 
ries and the economic phenomena of a time and 
people. The economist, like every other purveyor 
of truth, is, to a greater or less extent, " cribbed, 
cabined, and confined" by the facts of his immediate 
environment. Strive as he may to forecast the fu- 
ture, his speculations seldom far outrun the progress 
of material phenomena. Indeed, there is always a 
grave danger that his theories will crystallize in such 
fixed and definite forms that they will fail to respond 
to the never-resting progress of the events they are 
supposed to explain. Nowhere does this find more 
apt illustration than in the utter lack of correspond- 
ence between theory and phenomena in the third 
quarter of the nineteenth century. Again, in the 
almost revolutionary change in the whole status of 
the theories of value and distribution which the last 
quarter of the century has witnessed, we have a 
belated attempt to bring our theories into some sort 
of harmony with the existing facts. 

The most cursory examination of the economic 
conditions of the first and last quarters of the nine- 
teenth century will reveal a sharp contrast in the 



XX INTRODUCTION. 

tendency of the phenomena of the two periods. For 
example, in England, in the first quarter, we find all 
restrictions of trade giving way before the industrial 
revolution that was then at its height. The intro- 
duction of steam and the substitution of the factory 
for the home system of industry had well-nigh com- 
pleted the destruction of the old craft and guild 
system. The growing power of the new middle class 
that had arisen with the development of the factory 
system was now asserting itself. It insisted upon the 
abolition of the corn laws and, secure in its estab- 
lished industries, was willing to accept a gradual re- 
duction of import duties. In a word, the English 
economists of the early part of the century were con- 
fronted by the jmenomena of the rapid breaking 
down of all those trade restrictions which time and 
custom had rendered sacred. It is therefore not 
strange that they should have concluded that the 
day was not far distant when the ideal of free com- 
petition would be realized in the actual facts of in- 
dustrial life. Indeed, such progress had been made 
in this direction by the middle of the century that 
J. S. Mill writes, "scarcity values are rather con- 
ceivable than actually existing." 

The last quarter of the century has witnessed a 
rude awakening from this pleasant dream ; the ten- 
thousand-acre farms, the organization of labor in 
large and compact masses, the aggregation of great 
masses of capital into an even more complete soli- 
darity, — all evidence the utter collapse of that ideal 



INTRODUCTION. XX J 

of free competition which Mill thought was about to 
be realized. As another has well said, " Just when 
the disappearance of the last vestige of a volitional 
restriction of competition was looked for, and the 
universal application of the ' rule of the market' was 
confidently expected, we see a wide-spread revival 
of economic methods and agencies over which ' The 
Wealth of Nations' was read as a funeral service." * 

This rise of the modern system of labor organiza- 
tions, trusts, etc., has compelled a radical change in 
the attitude of economists towards the theories of 
value and distribution. They no longer hold that 
scarcity values are " rather conceivable than actually 
existing." Indeed, Mill's contention might well be 
reversed, since scarcity goods are the rule rather 
than the exception. It is the recognition of this fact 
that has constrained many economists to abandon the 
Cost Theory of Value and to substitute for it the 
Marginal Utility Theory of Value. 

It is, however, strange that the most strenuous 
advocates of the Marginal Utility Theory of Value 
have failed to see that this recognition of the general 
prevalance of scarcity values must compel the re- 
adjustment of our theory of distribution. The old 
scheme, which divided the social surplus into rent, 
wages, and interest, was based on the assumption of 
free competition. If this assumption does not cor- 

* See The Modern Distributive Process, by Clark and Gid- 
dings, p. 20. ' 



XX11 INTRODUCTION. 

respond with the facts, — if scarcity values do pre- 
vail, — then the surplus due to such scarcity value 
must receive recognition and name in our scheme of 
distribution. And yet modern economists have, for 
the most part, either followed Eicardo and con- 
founded this surplus with interest, or have followed 
Mill in the passage just quoted and confounded it 
with rent. 

Again, economists, especially those of the Austrian 
school, have insisted so strongly upon the general 
prevalence of scarcity values among concrete com- 
modities that they have failed to see that in the 
problem of interest we are dealing entirely with nor- 
mal value, or with that phenomenon of value in 
which marginal utility and marginal disutility coin- 
cide. Failing to see this, Bohm-Bawerk, formally 
and in the most uncompromising way, repudiates ab- 
stinence as having any part in the determination of 
interest. 

Possibly the most important contribution of Ameri- 
can economists has been to the theory of wages ; and 
yet, though establishing almost every point neces- 
sary to the construction of an Exchange Theory 
of Wages corresponding in all respects to Bohm- 
Bawerk's " Exchange Theory of Interest," they have, 
failed to recognize the possibility of such a theory of 
wages. 

There is one other change in the drift of economic 
thought which must also be examined with some 
care. This is the growing tendency to recognize the 



INTRODUCTION. Xxiii 

fact that rent is not peculiar to land, but is a general 
function common to all the factors of production. In 
German economics this general character of the rent 
function was recognized as early as 1807, but in Eng- 
lish literature it was not until the last quarter of the 
century that the movement in this direction became 
at all general. The reason for this delayed recog- 
nition by English economists is found in the accent 
thrown upon the rent of land by the English corn 
law agitation. 

In sketching the history of economic theory, how- 
ever, one must not only keep in mind its correspond- 
ence with economic phenomena, but must be persist- 
ent in recognizing the continuity in its development. 
The Abstinence, Productivity, and Use Theories of 
Interest, for instance, cannot be dismissed as so many 
vain attempts to solve a difficult problem, but instead 
they must be seen as parts of a progressive movement 
in thought which resulted in the Exchange or Normal 
Value Theory of Interest. In other words, the rec- 
ognition of this continuity is as essential to the right 
understanding of the history of economic theory as to 
the right understanding of any other phase of human 
endeavor. If this continuity in thought is clearly 
developed in the historic part of the present study 
the writer will have attained at least some measure 
of success. 



PART I. 



VALU E. 



VALUE AND DISTRIBUTION. 



CHAPTER I. 

THE COST THEORY OP VALUE. 

A eecent writer has well said, " There are certain 
unsettled questions in economic theory that have been 
handed down as a sort of legacy from one generation 
to another ;" questions that " return again and again, 
like troubled spirits doomed restlessly to wander 
until the hour of their deliverance shall appear." 
Among these is the question, " What is the ultimate 
standard of value ?" * 

Any attempt to answer this question is confronted 
by certain facts which are usually referred to as the 
paradoxes of value. These are as follows : 1. The 
most useful things, like air and water, are usually 
without value. 2. Useful things, like iron and cop- 
per, are not valued as highly as less useful things, 
like gold or diamonds. 3. By decreasing the supply 
of a commodity, and consequently the total utility to 
be obtained from it, the total value may be increased. 

* Bohm-Bawerk, Annals of American Academy, September, 
1894. 

19 



20 VALUE AND DISTRIBUTION. 

This was done by the Dutch East India Company 
when it destroyed a portion of the produce of its plan- 
tations in order to enhance the price of the balance. 
We have now to inquire what explanation the cost 
theory can offer for these paradoxes of value. 

I. THE EARLIER COST THEORY. 
It was not long before men perceived that in most 
instances there is a correspondence between the value 
of a commodity and its cost of production ; nor were 
they long in recognizing the further fact that this 
cost could be made to explain at least two of the 
above paradoxes of value. 

1. Paradoxes of Value explained by the Cost 
Theory. — With regard to the first parodox the solu- 
tion is evident. Such things as air and water have 
no value because they have no cost. 

The solution of the second paradox is almost as 
patent : Gold is more valuable than iron because on 
the whole it costs more than iron. 

In the case of the third paradox the solution is not 
so evident. But then it might be urged that a wilful 
destruction of commodities is of rare occurrence, that 
the limitation of supply which is here affected in an 
arbitrary way is usually determined by the cost of 
production. In other words, we here have the ex- 
ception that proves the rule. 

2. Free Goods eliminated from Economic Con- 
sideration. — Tested by the facility with which these 
complications were resolved, the advocates of the cost 



THE COST THEORY OF YALTTE. 21 

theory certainly had a strong case. Yet from the 
very first they hesitated to accept the logical results of 
their own reasoning. For if cost determines value, 
then things like air and water, which have no cost, 
can have no value. This, however, they were not pre- 
pared to admit, but declared that while such goods 
had "value in use" they had no "exchange value." 
But having thus established the distinction between 
these two forms of value they proceed to discuss 
" value in exchange," and do not trouble themselves 
any further about " value in use." It is necessary to 
bear in mind, however, that this did not involve the 
classical writers in any inconsistency. For the phe- 
nomenon of " value in use" was in their minds as- 
sociated with free goods, and so might fairly be 
dismissed from economic consideration. 

3. Scarcity Goods eliminated because of their 
Rare Occurrence. — The classical school did not get 
far in its attempts to apply the cost theory to the 
actual phenomena of economic life before it was con- 
fronted by goods whose value was far in excess of the 
cost either of production or of reproduction. This 
is the case with rare wines, pictures by the old mas- 
ters, etc. It was held, however, that such monopoly 
or scarcity goods are so small a part of the world's 
exchanges that they may safely be ignored in any 
discussion of the general phenomena of value. 

4. The Law of Cost only applicable to Freely Re- 
producible Goods. — Having eliminated both free and 
scarcity goods from the problem, the only phenomena 



22 VALUE AND DISTRIBUTION. 

of value left for the older economists to explain were 
such as are associated with freely reproducible goods. 
In regard to such goods, it was held that if the pro- 
ducer does not at least obtain his cost he will cease to 
produce ; if he secures a surplus above his cost, others 
will enter that branch of industry and increase the 
supply of the commodity until the price is forced 
down to the level of cost. This led the older econ- 
omists to conclude that in cost we nave a more or 
less exact measure of 'value. So satisfactory did this 
theory prove to be, so strong its hold upon economic 
thought, that it was not until the last quarter of the 
present century that another theory could find even 
a respectful hearing. 

II. THE MARGINAL COST THEORY. 

The earlier cost theory long found general accept- 
ance, but it is manifest that it fails to account for the 
products of better land and, in general, for all com- 
modities not produced at the margin. Yet it is not 
a difficult matter to state the theory so as to include 
all such commodities. This is done by substituting 
for the vague and indefinite concept of cost which 
the earlier economists had in mind the very definite 
concept of marginal cost. 

5. The Graphical Representation of Marginal 
Cost. — This concept of marginal cost may be shown 
graphically, as in Fig. 1. The amount of commodity 
is here laid off along the line OM. Other things 
remaining the same, the cost of production of sue- 




THE COST THEORY OP VALUE. 23 

cessive increments of commodity increases, and is 
represented by lines at right angles to OM. Thus, if 
the amount of the commodity 
is represented by the length Fig. l. 

of the line OA, then the cost 
of production of the last in- 
crement added to the stock is 
represented by the length of 
the line AD. As in general ° 
the cost of production increases with each successive 
increment of commodity, the line of cost, ODN, is 
an ascending line. 

6. Ricardo's Statement of the Marginal Cost 
Theory. — Bicardo, in his discussion of the rent of 
land, shows that every increase in the supply of corn 
compels us to have recourse to less and less fertile 
lands or to an ever-increasing cost of production.. 
He further contends that the value of corn is deter- 
mined by the cost of the last or most expensive incre- 
ment necessary to the maintenance of a given supply. 
Thus, if the supply of the commodity is OM (Fig. 1) 
and the cost of the final or most expensive increment 
is MN, then the value of each and every portion of 
the supply is determined by the cost MN of the final 
or marginal increment. Nor does Ricardo confine 
this proposition to the products of land, for he writes : 
"The exchangeable value of all commodities, whether 
they be manufactured, or the produce of the mines, 
or the produce of the land, is always regulated not 
by the least quantity of labor that will suffice for 



24 VALUE AND DISTRIBUTION. 

their production under circumstances highly favor- 
able and exclusively enjoyed by those who have 
peculiar facilities of production, but by the greater 
quantity of labor necessarily bestowed on their pro- 
duction by those who have no such facilities ; by those 
who continue to produce them under the most un- 
favorable circumstances ; meaning, by the most un- 
favorable circumstances, the most unfavorable under 
which the quantity of produce required renders it 
necessary to carry on the production." (Bohn edi- 
tion, p. 50.) It is true that the orthodox writers 
sometimes lose sight of this marginal concept, or, at 
least, have failed to keep it consciously in mind, and 
yet a moment's consideration will show that the doc- 
trine of rent, upon which their whole theory of dis- 
tribution was based, rests in last resort upon the 
contention that price is determined by marginal cost. 
Under this contention the products of the better land, 
greater skill, or more efficient machines are eliminated 
as exceptions to the law of cost, since under this law 
it is the marginal cost that determines price. 



CHAPTER II. 

CONDITIONS UNDER WHICH THE COST THEORY 
PAILS. 

It has already been shown that the cost theory 
of value rests upon the assumption that most com- 
modities are freely reproducible. It is against this 
assumption that the Austrian economists have di- 
rected their main attack, and have insisted that 
scarcity values are the rule rather than the ex- 
ception. It will be necessary, therefore, to examine 
with some care the argument by which these latter 
writers support this contention. One of the best 
statements of their case is found in that part of 
Bohm-Bawerk's "Capital and Interest" which is de- 
voted to the refutation of the " Exploitation Theory 
of Interest." 

I. THE CONTENTION OF THE AUSTRIAN ECONOMISTS. 

7. Exceptions admitted by Ricardo. — On page 
384 of " Capital and Interest" Ricardo is quoted as 
admitting that rare statues and pictures, scarce books 
and coins, and wines of a peculiar quality are ex- 
ceptions to the law of cost ; so, too, all products of the 
more fertile or more favorably situated land. 

Ricardo is also quoted as admitting that the law 
of labor cost fails where capital is employed. He 
writes : " The principle that the quantity of labor 

25 



26 VALUE AND DISTRIBUTION. 

employed in the production of goods regulates their 
relative value suffers a considerable modification by 
the employment of machinery and other fixed and 
durable capital." (Chap. I., Sees. 4 and 5, " Prin- 
ciples.") 

8. Additional Exceptions. — To this admitted list 
of exceptions Bohin-Bawerk adds all goods pro- 
duced under the protection of a patent, coypright, or 
tariff, and then, as though this list of exceptions was 
not sufficient, Bohm-Bawerk calls attention to the 
fact that even those goods which are ordinarily re- 
garded as freely reproducible are only so for the 
brief interval during which their price is at the 
normal point. At all other times or during their 
fluctuations on either side of this normal point their 
price is determined under monopoly conditions.* 

* Much confusion has arisen in the use of the phrase free 
competition. Thus, it is held by many that free competition 
prevails wherever there is no legal or other external restric- 
tions on trade. It is manifest, however, that quite inde- 
pendent of such external restrictions there may be an inter- 
ference with the freedom of competition. It will hardly be 
claimed that a handicapped man is competing freely, or that 
the lame and the halt compete freely with those who are fleet 
of foot, or, again, that the ignorant and the weak compete 
freely with the cunning and the powerful. "What, then, do 
we mean by free competition? If we take the case of any 
pronounced monopoly good, we find that its price varies more 
or less widely from the normal price. From this we are led 
to conclude that any good whose price varies from the normal 
is a monopoly or scarcity good, whether the variation is 



CONDITIONS UNDER WHICH THE COST THEOEY FAILS. 27 

II. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS 

FAILS. 

9. Marginal Cost Theory holds for Products of 
Better Land, etc. — So far as the products of better 
land, greater skill, or more efficient machines are 
concerned, the case against the cost theory fails the 
moment that it is recognized that it is marginal cost 
that determines value. Ricardo in admitting that 
the products of the better land are exceptions to the 
law of cost lost sight of the fact that it is marginal 
cost that determines price. 

10. Marginal Cost Theory holds for Products of 
Fixed Capital. — While the employment of machinery 
or other fixed capital tells very seriously against a 
labor theory of value, it does not necessarily tell 
against a cost theory of value if it is admitted that 
abstinence is a disutility or cost. Ricardo's state- 
ment of the case is certainly open to this interpreta- 
tion. He writes : " Mr. Malthus seems to think that 

large or small, or is maintained for a long or short interval. 
It follows from this that so-called freely reproducible goods 
are in reality scarcity goods, except during the interval that 
their price is at the normal point. Here, then, is the ultimate 
test of free competition, — the existence of normal price, or 
the existence of those conditions in which marginal utility 
and marginal disutility are equal. Any departure from the 
normal or any failure in the equating of utility and disutility 
implies the existence of a marginal surplus; and the exist- 
ence of such a surplus indicates that there is some interference 
with the freedom of competition. 



28'" VALUE AND DISTRIBUTION. 

it is part of my doctrine that the cost and the value 
of a thing should be the same ; it is, if he means by 
cost, cost of production including profits."* 

III. CASES IN WHICH THE CONTENTION OF THE AUSTRIANS 
MAY BE SUSTAINED. 

11. Patents, Tariffs, etc. — In a more recent publi- 
cation j" Bohm-Bawerk seems to have realized the 
weakness of his argument upon the two points just 
mentioned (goods produced by means of fixed capital 
or on the more fertile lands, etc.). In his restate- 
ment of the case against the cost theory he confines 
himself to those instances where the freedom of com- 
petition is interfered with by patents, tariff laws, etc. 
He writes : " There are at the present time very few 
products in which some patented machine or process 
or some import duty on raw or auxiliary material 
does not play a part." 

In other words, he contends, and rightly, that 
scarcity goods are the rule ; that competition at the 
margin is frequently interfered with by patent, im- 
port duty, etc. ; that non-competing groups among 
producers do exist ; that the marginal producer fre- 
quently secures a surplus above his cost, and, hence, 
that even marginal disutility must fail as the ulti- 

* Eicardo undoubtedly uses the term profits in a somewhat 
confused way; but that it here includes interest there can 
be little doubt. 

y Annals of American Academy, September, 1894, p. 55. 



CONDITIONS UNDER WHICH THE COST THEORY FAILS. 29 

mate standard of value. Bohm-Bawerk does not 
state the case in just this way, but the most cursory 
examination of his article on " The Ultimate Stand- 
ard of Value" will show that in this later contribu- 
tion he ignores all portions of the product that are 
produced under specially advantageous circumstances, 
and confines himself to showing the frequent occur- 
rence of those monopoly or scarcity goods in the pro- 
duction of which the marginal producer secures a 
surplus over and above all cost, either in labor or 
abstinence. It is important that this point in the 
argument should be clearly apprehended, for in 
another chapter I shall endeavor to show that the 
marginal utility theory fails for much the same 
reason, — to wit, that in many instances the marginal 
consumer secures a surplus. 



CHAPTEE III. 

THE UTILITY THEORY OP VALUE. 

I. THE EARLIER UTILITY THEORY. 

The first attempt to formulate a theory of value 
of which we have any record resulted, as we have 
seen, in a Cost Theory of Value. It is, however, 
more than probable that the first explanation that 
suggested itself was that things are valuable because 
they are useful. The utility here in mind was not, 
however, the precise modern concept of marginal util- 
ity, but a more or less vague and indefinite concept 
of utility like the earlier concept of cost. 

12. The Failure of the Earlier Utility Theory to 
explain the Paradoxes of Value. — The moment an 
attempt is made to apply this Earlier Utility Theory 
to the several paradoxes of value its defects become 
manifest. It fails completely to explain why such 
useful things as air and water are valueless ; why gold 
is more valuable than the more useful commodity 
iron; or why the Dutch East India Company de- 
stroyed a portion of its crops when they were ex- 
ceptionally large. It was doubtless this failure of 
the earlier utility theory of value that compelled 
men to have recourse to the cost theory, in which 
they found a more or less satisfactory explanation of 
these paradoxes. 

30 



THE UTILITY THEORY OF VALUE. 31 

The modern advocates of the utility theory of 
value hold that this earlier abandonment of the util- 
ity theory was premature, and that under the recon- 
structed form of the Marginal Utility Theory of 
Value we have an entirely satisfactory explanation 
of the general phenomena of value and of the several 
paradoxes that proved so fatal to the earlier statement 
of the utility theory. 

II. THE MARGINAL UTILITY THEORY OF VALUE. 

That value and price depend upon demand and 
supply has long been recognized as a truism. Again, 
it was recognized that the value of a commodity 
cannot be determined unless we know the amount of 
the commodity offered for sale. But it was not until 
the promulgation of the marginal utility theory of 
value that this mutual interdependence of supply, 
demand, and value was apprehended in an entirely 
clear and definite way. 

The Theory of Marginal Utility is based upon the 
familiar experience that pleasures when repeated de- 
crease in intensity. Hence if there is but one loaf 
of bread between a man and starvation he will, of 
course, value it very highly. But if he has a hun- 
dred loaves he will not value bread so highly. In 
this case the value of the bread will be fixed by the 
pleasure, satisfaction, or utility dependent upon the 
possession of the hundredth loaf. If the man has 
but fifty loaves, the value of the bread will be de- 
pendent on the utility of the fiftieth loaf; and in 



32 VALUE AND DISTRIBUTION. 

general the value of the bread will be dependent 
upon the utility of the last or marginal loaf. 

13. Gossen and his Work. — The first to formu- 
late the Marginal Utility Theory of Value was Her- 
man Heinrich Gossen in his " Entwickelung der Ge- 
setze des menschlichen Verkehrs, etc.," published 
in 1854. In his introduction, Gossen declared that 
he had made as important a discovery in the field of 
National Economy as Copernicus had made in the 
domain of Astronomy. As a matter of fact, he did 
give us a fairly complete statement of the modern 
theory of marginal utility. The book, however, was 
received with such scant courtesy that the author 
withdrew it from the trade and died a bitterly dis- 
appointed man. 

Gossen starts out with Bentham's thesis, that hap- 
piness or utility is the ultimate motive of all human 
action. Gossen clearly recognizes that in the con- 
sumption of a commodity there is a more or less 
regular decrease in the pleasure of consumption ; 
and that if the supply is large enough the point of 
satiety would ultimately be reached. Again, an 
early repetition of the act of consumption would in- 
volve a lower initial pleasure and a shortening of the 
period of enjoyment. Gossen sees, too, that it is the 
marginal pleasure or utility that fixes the value of 
the commodity, and holds that the condition of ex- 
change of two commodities is the equality of the 
pleasure derived from the last atoms (letzten Atoms) 
of the two commodities exchanged. Again, he holds 



THE UTILITY THEORY OF YALUE. 33 

that the ideal condition for society as a whole is 
where commodities are so distributed among men 
that the last atom of every commodity yields the 
same amount of pleasure. Gossen's work diners from 
that of more recent writers in that he never loses 
sight of the moral or social aspect of the question. 
Marginal utility only interests him as it enables him 
to formulate the cqjs^IwS fit ^w^i happiness or 
the conditions of^Pme§^(S^€f#$F,. IrnMfoe develop- 
ment of his argument J^Vegi^l^^h 6 'same graphic 
illustrations thafehgfve since become soJajmliar. He, 
however, lavs off imits^%^m¥^M'tE%^orizontal axis 
instead of units of commodityT" 011 ^ as a unit of com- 
modity is consumed in a unit of time, the result is the 
same as if a unit of commodity were laid off on the 
horizontal axis.* 



* The following passages are italicized in Gossen : 
Der Mensch richte seine Handlungen so ein, dass die Sum me 
seines Lebensgenusses ein Grosstes werde. (Page 3.) 

1. Die Grosse eines und desselben Genusses nimmt, wenn 
wir mit Bereitung des Genusses ununterbroehen fortfahren, 
fortwahrend ab, bis zuletzt Sattigung eintritt. (Page 4.) 

2. Eine ahnliche Abnahme der Grosse des Genusses tritt 
ein, wenn wir den fruher bereiteten Genuss wiederholen, und 
nicht bloss, dass bei wiederholter Bereitung die ahnliche Ab- 
nahme eintritt, auch die Grosse des Genusses bei seinem Be- 
ginnen ist eine geringere, und die Dauer, wahrend welcher 
etwas als Genuss empfunden wird, verkiirzt sich bei der 
"VViederholung, es tritt fruher Sattigung ein, und beides, an- 
fangliche Grosse sowohl, wie Dauer, vermindern sich um so 
mehr, je rascher die "VViederholung erfolgt. (Page 5.) 

3 



34 VALUE AND DISTRIBUTION. 

14. Jevons, Walras, and Menger. — The first recog- 
nition of the great importance of Gossen's work is 
found in the preface to the second edition of Jevons's 
" Theory of Political Economy," published in 1879. 
German economists seem to have remained ignorant 
even of its existence until their attention was thus 
called to its great importance. Jevons published his 
first edition in 1871, while at about the same time two 
other economists, Walras and Menger, promulgated 
the same doctrine. It is, therefore, most interest- 
ing to note that the message which in 1854 could not 
even secure a hearing is so much in the air in 1871 
that three widely separated economists, Jevons, Wal- 
ras, and Menger, gain fame in proclaiming it. There 
seems to be but one explanation of this phenomenon. 
Gossen wrote in 1854 while economists were still in 
bondage to the fundamental premise of orthodox 

Der Tausch blcibt fur A, wenn gleiche Quantitaten gegen 
einander vertauscht werden, so lange vortheilhaft, bis der 
Werth des letzten Atoms bei beiden Gegenstanden, welche in 
den Besitz des A gelangen, gleich gross geworden ist. 

Es muss jeder der beiden Gegcnstande nach dem Tausche 
unter A und B der Art sich vertheilt finden, dass das letzte 
Atom, welcbes jeder von einem jeden erbalt, beiden gleich 
grossen Werth schafft. (Pages 84 and 85.) 

Damit durch den Tausch ein Grosstes von Werth entstehe, 
muss sich nach demselben jeder einzelne Gegenstand unter 
alle Menschen so vertheilt finden, dass das letzte Atom, 
welches jedem von einem jeden Gegenstande zufallt, bei ihm 
den gleich grossen Genuss scbafft, wie das letzte Atom des- 
selben Gegenstandes bei einem jeden andern. (Page 85.) 



THE UTILITY THEORY OF VALUE. 35 

economics, that scarcity commodities are the excep- 
tion and freely reproducible goods the rule. But by 
1871 economic conditions had so changed that econo- 
mists were constrained to recognize the utter falsity 
of this proposition, and so were compelled to seek for 
a theory of value that would include the case of 
scarcity goods. 

The cause of the failure of the earlier advocates 
of the utility theory is now manifest. They did not 
even see the real difficulty that confronted them ; 
did not recognize the fact that in the consumption 
of a given commodity a number of different utilities 
are developed. It therefore never occurred to them 
to ask the interesting question, Which of these 
utilities is it that determines the value of the com- 
modity ? As this is a crucial point in the develop- 
ment of the modern utility theory, it may be well 
to allow its advocates to state the case in their own 
language. 

15. Bohm-Bawerk's Statement of the Theory of 
Marginal Utility. — After a careful elaboration of a 
number of concrete instances, Bohm-Bawerk sums 
up : " The case, then, stands as follows : Wants which 
are more important than this ' last' want will not be 
affected by the loss of the good, for their satisfaction 
is, as before, guaranteed in case of need by the .re- 
placement of substitutes.* Nor will those wants be 

* This is based upon the assumption that we have a number 
of equally efficient increments of commodity, say fifty loaves 



36 VALUE AND DISTRIBUTION. 

affected which are less important than this ' marginal 
want,' for they go unsatisfied whether the good is 
there or not. The only want affected is the last of 
those that otherwise would be satisfied : it will be 
satisfied if the good is there ; it will not be satisfied 
if it is not there. It is thus the dependent want we 
were seeking. 

"Here, then, we have reached the goal of the 
present inquiry and may formulate it thus : the value 
of the good is measured by the importance of that 
concrete want, or partial want, which is least urgent 
among the wants that are met from the available 
stock of similar goods. What determines the value 
of a good, then, is not its greatest utility, not its 
average utility, but the least utility which it, or one 
like it, might be reasonably employed in providing 
under the •concrete economical conditions. To save 
ourselves a repetition of this circumstantial descrip- 
tion, — which, nevertheless, has to be somewhat cir- 
cumstantial to be quite correct, — we shall follow 
Wieser in calling this least utility — the utility that 
stands on the margin of the economically permissible 
— the economic Marginal Utility of the good. The 
law which governs amount of value, then, may be 
put in the following very simple formula : The value 
of a good is determined by the amount of its mar- 
ginal utility. 

of bread. In this case the loss of one loaf would lead to the 
substitution of another equally efficient loaf. 



THE UTILITY THEORY OF VALUE. 



37 



" This proposition is the keystone of our theory of 
value. But it is more. In my opinion it is the mas- 
ter-key to the action of practical economic men with 
regard to goods. In the simplest cases, as in all 
the tangle and complication which our present varied 
economic life has created, we find men valuing the 
goods with which they have to deal by the marginal 
utility of these goods, and dealing with them accord- 
ing to the result of this valuation. And to this ex- 
tent the doctrine of marginal utility is not only the 
keystone of the theory of value, but, as affording the 
explanation of all economical transactions, it is the 
keystone of all economical theory." * 

16. Graphic Illustration of the Marginal Utility- 
Theory. — This theory finds graphic illustration in 
Fig. 2. The amount of com- 
modity is here laid off along 
the line OM. The utility of 
successive increments of com- 
modity is represented by lines 
at right angles to OM. Thus, 
if the amount of the com- 
modity is represented by the 
length of the line OA, then 
the utility of the last incre- o 
ment of the supply of the 
commodity is represented by the length of the line 
AU. But if the amount of the commodity is repre- 



Fig. 2. 




* Positive Theory of Capital, pp. 148, 149. 



38 VALUE AND DISTRIBUTION. 

sented by the length of OM, the utility of the last 
increment of the supply is represented by the length 
of MN. As the utility decreases with each succes- 
sive increment of the supply of the commodity, the 
line of utility, YUN, is a descending line. Again, 
according to the marginal utility theory, the value of 
the whole commodity is determined by the utility of 
the last increment of the supply of the commodity. 
Thus, if the amount of commodity is OA, the mar- 
ginal utility or value of the commodity is AU ; if, 
however, the amount of commodity is OM, then the 
marginal utility or value of the commodity is MN. 

(a) Value pee, Unit veesus Total Value. — It 
should be noticed that under the above assumptions 
AU and MN represent severally the marginal utility 
or value per unit of the commodity. There is, how- 
ever, another concept of value with which it is some- 
times necessary to deal, and which must be care- 
fully distinguished from the concept of value jjer 
unit. The concept here referred to is that of total 
value, which is represented by the areas of the rec- 
tangles OAUF and OMNE, or by quantity of com- 
modity multiplied by value per unit. 

(b) Total Value versus Total Utility. — There 
is still another concept that must be carefully dis- 
tinguished from total value. We here refer to the 
concept of total utility, which is represented by the 
area OAUY if the margin is at A and by the area 
OMNY if the margin is at M. It is here mani- 
fest that total utility and total value are essentially 



THE UTILITY THEORY OF VALUE. 39 

different concepts, total utility exceeding and in- 
cluding total value. 

17. The Marginal Utility Theory and the Para- 
doxes of Value. — (a) Why are Air and "Water 
Valueless, and why is Iron of Less Value than 
Gold ? — To both of these questions the advocates of 
marginal utility find a ready answer. We cannot 
do better than to quote again from Bohm-Bawerk : 
" Here, then, we have an entirely natural explana- 
tion of the phenomenon which originally struck us 
as so surprising, that comparatively ' useless' things, 
such as pearls and diamonds, have so high a value, 
while infinitely more ' useful' things, like bread and 
iron, have a far less value, and water and air no 
value at all. Pearls and diamonds are to be had in 
such small quantities that the relative want is only 
satisfied to a trifling extent, and the point of mar- 
ginal utility which the satisfaction reaches stands 
relatively high. Happily for us, on the other hand, 
bread and iron, water and light, are, as a rule, to be 
had in such quantities that the satisfaction of all the 
more important wants which depend on them is as- 
sured. Only very trifling concrete wants, or no 
wants at all, are dependent, for instance, on the com- 
mand over a piece of bread or a glass of water. It 
is, of course, true that in abnormal circumstances — 
as, for instance, in besieged towns, or in desert 
journeys, where water and food is scarce, and small 
stores only suffice to meet the most urgent concrete 
wants of meat and drink — the marginal utility flies 



40 VALUE AND DISTRIBUTION. 

up. According to our principles the value of these 
goods, otherwise of so little account, must rise also, 
and the inference finds ample empirical confirmation 
in the enormous prices paid in such circumstances 
for the most wretched means of subsistence. Thus, 
those very facts which, at first sight, seemed to con- 
tradict our theory that the amount of value is de- 
pendent upon the amount of utility, on closer exam- 
ination afford a striking confirmation of it."* 

There is, however, another phase of this paradox 
that may need some further explanation. We have 
seen in what way and why gold may have a greater 
value than iron, but we have not explained just how 
and why we continue to think of iron as the more 
useful metal. That is, we have not brought this fact 
into accord with our utility theory of value. Put in 
a brief way, the explanation is found in the fact that 
a great reduction in our supply of so-called neces- 
saries might raise their marginal utility to almost any 
point or degree of importance, — even to the impor- 
tance of maintaining life itself. On the other hand, 
no reduction in the supply of commodities that are 
not necessary for the maintenance of life could ever 
reach the same degree of importance or the same 
marginal utility. Bohm-Bawerk's more elaborate 
discussion of this question will be found on page 144 
of " Positive Theory of Capital." 

(b) Why did the Dutch East India Company 

* Positive Theory of Capital, pp. 152, 153. 



THE UTILITY THEORY OF VALUE. 



41 



Fig. 3. 



destroy A Portion of their Crops ? This paradox 
is readily explained in terms of the marginal utility 
theory of value. Let us 
assume (Fig. 3) that our 
utility curve takes a sud- 
den change in direction 
at the point U, or that 
an increase in the sup- 
ply of commodity be- 
yond OA occasions a 
much more rapid de- 
cline in marginal utility 
than was occasioned by 
an equal increase in 
commodity before that point was reached. The 
result manifestly would be that, despite the increase, 
AM, in the quantity of commodity, the total value 
has decreased from the area OAUF to the area 
OMNE. Under such circumstances a seller con- 
trolling a large part of the supply might profitably 
destroy a portion of his commodity, since he would 
thereby increase not only the marginal utility but 
the total value as well. From this, it is clear that 
the Marginal Utility Theory is even more efficient 
than the Cost Theory in resolving the several para- 
doxes of value. 




CHAPTER IV. 

CONDITIONS UNDER WHICH THE UTILITY THEORY 

FAILS. 

It has already been shown that the Earlier Utility 
Theory failed to explain the several paradoxes of 
value. On the other hand, it has been seen how 
complete and satisfactory are the explanations offered 
by the Marginal Utility Theory. It remains to be 
shown that even this theory does not afford an en- 
tirely satisfactory solution of the ever interesting 
problem of price. 

Towards the close of his earlier argument Bohm- 
Bawerk writes : " If — what is practically inconceiva- 
ble — production were carried on in ideal circum- 
stances, unfettered by limitations of space and time, 
with no friction, with the most perfect knowledge of 
the position of human wants requiring satisfaction 
and without any disturbing changes of wants, stocks, 
or technique, then the original productive powers 
would, with ideal and mathematical exactitude, be 
invested in the most remunerative employments, and 
the law of costs, so far as we can speak of such a law, 
would hold in ideal completeness." * 

In other words, it is here maintained that the law 
of cost is only true under the assumption of an ideal 

* Positive Theory of Capital, p. 233. 
42 



CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 43 

condition of free competition among producers. It 
is the purpose of the present chapter to show that 
the law of marginal utility is likewise based upon 
the assumption of an ideal condition of free com- 
petition. 

It will be remembered, however, that the Austrian 
economists called attention to the fact that Ricardo 
admitted the failure of the Cost Theory in the case 
of rare wine, paintings by the old masters, etc. (See 
page 25.) It may, therefore, be well to note that 
they themselves have made even more serious admis- 
sions as against their own theory. 

18. Bohin-Bawerk's admitted Exceptions to the 
Law of Marginal Utility.— On page 217 of "The 
Positive Theory of Capital," Bohm-Bawerk admits 
that marginal utility fails, at least in exactness, in 
the case of money and labor. May it not, then, 
fairly be urged that while " there are at the present 
time very few products in which some patented ma- 
chine or process or some import duty on raw or aux- 
iliary material does not play a part," yet it is equally 
true that there are few products in which varia- 
tions in the value of money and labor do not play 
a part ? 

Again, in his discussion of the three possible 
forms of exchange, Bohm-Bawerk writes, "In iso- 
lated exchange — exchange between one buyer and 
one seller — the price is determined somewhere be- 
tween the subjective valuation of the commodity by 
the buyer as upper limit and the subjective valuation 



44 VALUE AND DISTRIBUTION. 

of the seller as lower limit." * Or he admits that 
in all such cases the marginal utility of the good to 
the buyer and seller only establishes limits within 
which the price may vary. In other words, mar- 
ginal utility fails in exactness in all cases of isolated 
exchange. 

Then, too, of the case of one-sided competition, he 
writes : " First. The competition of buyers has the 
effect of narrowing the sphere within which price is 
determined, and narrowing it in the upward direc- 
tion. Second. One-sided competition of sellers forms 
the exact converse of the foregoing. Entirely analo- 
gous tendencies lead to entirely analogous results — 
only in an opposite direction." f Here we again 
have an admission that there is quite a sphere within 
which the price may vary, or an admission that 
marginal utility fails in exactness in all cases of one- 
sided competition. 

Lastly, in his discussion of two-sided competition, 
he sums up as follows : " If, finally, we substitute the 
short and significant name of ' Marginal Pairs' for 
the detailed description of the four parties whose 
competition determines the price, we get this very 
simple formula : The market price is limited and 
determined by the subjective valuation of the two 
Marginal Pairs." % In other words, Bohm-Bawerk 



* Positive Theory of Capita), p. 199. 
f Ibid., p. 201. 
X Ibid., p. 209. 



CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 45 

here admits that in all three forms of exchange the 
valuations of buyers and sellers merely establish 
limits within which the price may vary. Again, he 
writes : " According as in the conduct of the trans- 
action the buyer or seller shows the greater dex- 
terity, cunning, obstinacy, j)Ower of persuasion, or 
such like, will the price be forced either to its lower 
or to its upper limit." * Clearly, then, the 'price in 
all three cases may be determined at a point which is 
less than the valuation of the marginal buyer. From 
this it follows that this last or marginal buyer secures 
a surplus, and hence that marginal utility fails as an 
exact determinant of price. 

19. How Bohm-Bawerk would escape from the 
Consequences of these Admissions. — It will now be 
interesting to inquire how Bohm-Bawerk would es- 
cape from a position so fatal to the Marginal Utility 
Theory. This he endeavors to do in his chapter on 
Price. The first two forms of exchange are ignored 
on the ground that the bulk of the world's exchanges 
comes under the head of two-sided competition. He 
then devotes his attention to this last form, and en- 
deavors, first, to eliminate the marginal pair of sell- 
ers, and, second, to reduce the difference in the valua- 
tions of the marginal pair of buyers to an amount 
so small that it may safely be ignored. Price is then 
determined by the valuation of the last buyer or by 
marginal utility. It will be well to follow his reason- 

* Positive Theory of Capital, p. 199. 



46 VALUE AND DISTRIBUTION. 

ing upon this point with some care. (See " Positive 
Theory of Capital," pp. 220, 221.) 

(a) The Elimination or the Marginal Pair of 
Sellers. — Let us turn first to that part of his argu- 
ment in which he seeks to eliminate the marginal 
pair of sellers. It is undoubtedly true that under 
modern conditions many commodities are produced 
in anticipation of the market, and " when goods are 
once produced and the owner can do nothing with 
them for his own personal wants, they must, all the 
same, seek a market," and the seller must accept 
whatever price the buyer is willing to pay. In other 
words, the marginal utility of the good to the seller 
is here so low that it does not enter into the problem, 
the determination of the price coming entirely from 
the side of the buyer. This, I take it, is the reason- 
ing by which Bohm-Bawerk eliminates the marginal 
pair of sellers. Nevertheless, it may fairly be urged 
that no inconsiderable part of many commodities is 
still made or produced to order, or while more clothes 
are now manufactured in anticipation of the market 
than a hundred years ago, yet some clothes still are 
and probably ever will be made to order. And a 
standard of price that fails to determine the price of 
goods made to order can hardly be accepted as a uni- 
versal standard of price. 

The orthodox school, undoubtedly, had in mind 
this latter class of goods, while the Austrians have 
called attention to the fact that in modern times the 
tendency is to produce in anticipation of the market. 



CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 47 

So long as they urge this fact to show the failure of 
the law of cost I am not here disposed to disagree 
with them, but when they rest their theory of value 
upon the assumption that goods made to order now 
form so inconsiderable a part of the world's produc- 
tion that they may safely be ignored, I am constrained 
to part company with them. 

(b) The Elimination of One of the Two Mar- 
ginal Buyers. — Note again, that Bohm-Bawerk re- 
stricts the law of marginal utility " to prices actually 
established within a large and organized market." 
He then concludes : " If the buyers are very numer- 
ous, the interval between the figures which two suc- 
cessive buyers put on their valuation is so small that 
the zone limited by the figure of the last buyer and 
that of the first unsuccessful competitor is narrowed 
almost to a point. And so far as this is the case it 
may be asserted, with sufficient exactness, of the 
economic exchange which goes on in large markets, 
that the market price is determined by the Valua- 
tion of the Last Buyer." In other words, he practi- 
cally assumes that the bulk of the world's goods is 
sold in markets that are large and well organized ; a 
contention not easily maintained, especially in re- 
gard to retail markets or those that touch the con- 
sumer most nearly. In any event, there are many 
goods sold in markets that are neither large nor well 
organized, and under the above assumption these 
goods are clearly excluded from the operation of the 
law of marginal utility. 



48 VALUE AND DISTRIBUTION. 

To sum up, then, we find, by the admissions of 
Bohm-Bawerk himself, that the laiv of marginal utility 
fails in exactness, not only for money and labor, but 
also for all cases of isolated exchange, for all cases of 
one-sided competition, for all goods made or produced 
to order, and for all goods sold in markets that are not 
large and well organized. In other words, we find a 
list of admitted exceptions to the Law of Marginal 
Utility that is at least as formidable as any that can 
be urged against the Law of Cost. 

20. The Defect in the Analysis of the Austrian 
Economists. — In Chapter II. the failure of the cost 
theory was shown not only by the many serious and 
admitted exceptions to this theory, but also by the 
fact that in last resort it rests upon the unwarranted 
assumption of ideal free competition among pro- 
ducers. In the present chapter I have thus far 
shown the failure of the Marginal Utility Theory by 
an equally serious list of admitted exceptions. It 
now remains for me to show that the Marginal Utility 
Theory rests upon a like unwarranted assumption of 
free competition. 

(a) The Marginal Utility Theory rests upon 
the Unwarranted Assumption of Free Compe- 
tition among Consumers. — We have just seen that 
if the buyers are very numerous the difference be- 
tween the valuations of the "last buyer and the 
first unsuccessful competitor is narrowed almost to a 
point." We have now to inquire what happens when 
this difference in valuation is not narrowed to a point. 



CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 49 

It is manifest that under such circumstances there 
might be quite an appreciable decline in the price be- 
fore the first unsuccessful buyer would really begin 
to compete for the commodity in question. In other 
words, the existence of an appreciable difference be- 
tween the valuation of the last buyer and the first 
unsuccessful competitor implies or is the result of 
some failure in the freedom of competition among 
buyers or consumers. 

Now, it may be urged by the advocates of marginal 
utility that under the assumption of a " large and 
organized market" the probability of such a failure 
in the freedom of competition is very remote ; that 
under this assumption price will vary continuously 
with the supply of the commodity and buyers will 
be able to range themselves in a differential series, 
etc. I will not combat this contention at this point 
in the argument, but would call attention to the un- 
warranted assumption upon which this contention 
rests. For if the existence of an appreciable difference 
betiveen the valuations of the two marginal buyers im- 
plies the existence of some interference with the free- 
dom of competition among buyers or consumers, then 
the absence of such difference between their valuations 
implies the existence of ideal free competition among 
buyers or consumers. In other words, the Marginal 
Utility Theory rests in last resort upon the unwar- 
ranted assumption of ideal free competition among 
consumers just as the Marginal Cost Theory rests upon 



50 VALUE AND DISTRIBUTION. 

the like unwarranted assumption of ideal free compe- 
tition among producers. 

(b) Marginal Utility Theory fails because 
the Marginal Consumer frequently secures a 
Surplus. — Let us now return to the contention that 
where the buyers are numerous the difference be- 
tween the valuations of the marginal pair of buyers 
is narrowed almost to a point. This, as we have just 
seen, rests upon an altogether unwarranted assump- 
tion. Though there were a million buyers, how can 
it be said that the valuation of the million and 
first will necessarily vary by a differential from the 
millionth buyer? Why may there not be at any 
point a non-competing group or an interference with 
the freedom of competition among buyers as well as 
among sellers, among consumers as well as among 
producers ? If such an interference with the freedom 
of competition does arise, then the price may be fixed 
at a point " which is somewhat less than the valuation 
of the thousandth buyer and somewhat higher than 
the valuation of the thousand and first." Under 
these conditions the utility of the commodity to the 
actual marginal buyer would be greater than the 
price paid. He would therefore secure a marginal 
surplus and marginal utility would here fail as the 
standard of price, for the same reason that it fails in 
the case of isolated exchange, one-sided competition, 
and for all goods that are sold in markets that are 
not large and well organized. In other words, mar- 
ginal utility fails because the marginal consumer fre- 



CONDITIONS UNDER WHICH UTILITY THEORY FAILS. 51 

quently secures a surplus, just as marginal cost fails 
because the marginal producer frequently secures a 
surplus. 

That the introduction of the concept of consump- 
tion as varying by differential increments has been of 
advantage to economic theory none will deny; and 
yet it is questionable whether this concept has not 
been as fruitful of errors as any yet introduced into 
the science. For its advocates fail to see, or at least 
to keep in mind, the assumption upon which it rests, 
— namely, an ideal condition of free competition 
among consumers. So long as we do not lose sight 
of this, the concept of differential increments may 
be useful for certain theoretic purposes. But when 
we lose sight of the assumption that lies back of the 
Marginal Utility Theory, and hold that free compe- 
tition on the side of the consumer exists generally in 
the economic world, confusion must result. 

There is probably no commodity whose market 
satisfies the ideal conditions more closely than that 
of wheat, and yet it may very readily have hap- 
pened that in a recent decline in the price of wheat 
there may have been quite an appreciable break be- 
tween the point at which the price corresponded to 
the marginal utility of wheat for the feeding of 
human beings and the point where it became profit- 
able to feed it to hogs. Again, while at certain 
prices the sugar market may be very elastic, yet a 
point might readily be reached where all our present 
uses or desire for sugar would be satiated. In this 



52 VALUE AND DISTRIBUTION. 

case quite an appreciable fall in price might fail to 
increase its consumption. This is practically the 
case with salt at present prices. So, too, with pep- 
per, matches, and a number of other commodities. 
It hardly need be again urged that this is generally 
true of all cases of isolated exchange of one-sided 
competition, and of all goods whose market is neither 
large nor well organized. As a matter of fact, the 
market for these, as for all other commodities, is 
only perfectly elastic or satisfies the conditions as- 
sumed by the Austrian economists so long as the 
price remains withiu more or less definite limits. It, 
however, loses this elasticity or fails to satisfy these 
conditions when the price passes either the upper or 
lower of these limits. 

That the orthodox school practically assumed the 
existence of an ideal condition of free competition 
among producers cannot be denied. But, as we 
have endeavored to show, the advocates of marginal 
utility have assumed a like ideal condition of free 
competition, or have assumed that there are no non- 
competing groups among consumers. That such an 
ideal condition of free competition, either on the side 
of production or of consumption, exists generally in 
the markets of the world, or is permanently estab- 
lished in the market of any one commodity, may 
well be questioned. It may be that an interference 
with the freedom of competition is much more fre- 
quent among producers than among consumers. And 
this because of the greater facility for combining 



CONDITIONS UNDER "WHICH UTILITY THEORY FAILS. 53 

which the producers enjoy. But be that as it may, it 
still remains true that a theory of price which rests 
upon the assumption of free competition among con- 
sumers is without sufficient warrant and can hardly 
be said to furnish us with an ultimate standard of 
price. 



CHAPTER V. 

THE MONOPOLY THEORY OP PRICE. 

It is the contention of the present writer that 
while value is determined by marginal utility price 
is never so determined save in the case of normal 
value and price. In the case of scarcity goods, or 
the great bulk of the world's commodities, the mar- 
ginal utility of the good to the consumer and its 
marginal utility to the producer only establish limits 
within which the price may vary. Its final loca- 
tion depends upon the relative monopoly strength 
of consumer and producer, and so is incapable 
of any exact determination. This in brief is the 
Monopoly Theory of Price which will here be pro- 
posed.* 

* By value is here meant the subjective importance of a 
good. This is measured in terms of marginal utility. By 
price is meant the quantity of money, or of the objective 
money commodity for which the good in question will ex- 
change. 

Yalue as thus denned corresponds to the subjective use 
value of the Austrian economists, and price to their objective 
exchange value. It is true that we might say that the objec- 
tive exchange value of a cow is the horse for which it is ex- 
changed, but in any developed society these direct exchanges 
are rare, — almost all exchanges being made against money. 
And so we find that as a matter of fact the Austrians limit 
objective exchange value to the phenomenon of price. 
54 



THE MONOPOLY THEORY OF PRICE. 



55 



Fig. 4. 




I. THE PRICE OF A SINGLE GOOD. 

21. Normal Value and Price. — If with the older 
economists we hold that free competition is the rule 
and scarcity goods the exception, then our investiga- 
tion must be confined to the phenomena of normal 
value and price. In this case marginal utility, mar- 
ginal disutility, value, and price all coincide. This 
is brought out quite 
clearly in Fig. 4. In 
Fig. 1 we had the dia- 
gram of the line of cost 
or disutility. In Fig. 2 
we had the diagram of 
the line of utility. In 
Fig. 4 these two dia- 
grams are combined. Here the line of utility, UiU 2 , 
and the line of disutility, DiD 2 , intersect at the point 
N. If the supply of the commodity is OA^ the utility 
AiUi exceeds the disutility A^. This indicates 
that the production of the commodity is profitable, 
and therefore that others will be induced to enter 
this branch of industry. If this results in an in- 
crease of the amount of commodity to OA 2 , the dis- 
utility A 2 D 2 exceeds the utility A 2 U 2 . This indi- 
cates that the production of the commodity is no 
longer profitable ; a restriction in the amount of 
commodity produced will therefore result. The 
tendency, of course, will be for the production of 
the amount of commodity to settle at OM, where the 



56 VALUE AND DISTRIBUTION. 

utility and disutility are equal. This is the case of 
normal value and price, both of which are here 
represented by MN.* 

22. Other Conditions under which Marginal Util- 
ity determines Price. — It is true that if competi- 
tion is assumed to be absolutely free on the side of 
the consumers (that is, the producers have the entire 
monopoly advantage), the price of the good may be 
forced up to the limit of its marginal utility to the 
consumer. But, on the other hand, it is equally true 
that if competition is absolutely free on the side of 
the producers (the consumers having the entire 
monopoly advantage) the price may be forced down 
to the extreme limit of the marginal utility of the 
good to the producer. This finds graphic illustra- 
tion in Fig. 4. The case where the producer has 
the monopoly advantage is indicated by AJDJJ^ while 
the consumer has the monopoly advantage in the 
case indicated by A 2 U a D 2 . 

It may at first be somewhat confusing to speak 
of this last case as a case of monopoly or scarcity 
price, since the supply of the good offered by the 
producer is in excess of the normal supply. The 
confusion, however, is largely due to our tendency to 
regard one-half of the transaction as the whole phe- 
nomenon, just as in physics there is a tendency to 
think of force and resistance as separate phenomena. 

* This diagram was, I believe, first employed by Marshall 
in a paper that only had a private circulation. 



THE MONOPOLY THEORY OF PRICE. 57 

The physicist, however, sees very clearly that action 
and reaction are necessary complements of each 
other, and in the same way the commodities offered 
in exchange by the producer and the consumer are 
necessary complements of each other. While it may 
not be strictly correct to speak of the commodity 
offered by the producer as a scarcity good when its 
price is below its cost, yet it is true that its price is 
determined under monopoly conditions, only the 
monopoly is due to the relative scarcity of the com- 
modity offered in exchange by the consumer ; the 
monopoly, therefore, inures to the benefit of the con- 
sumer by enhancing the purchasing power of his com- 
modity. In other words, we here have one of those 
unfortunate abstractions of the understanding, as 
Hegel styles them, in which half the phenomena is 
taken for the whole. 

In general, however, neither competition nor mo- 
nopoly is absolute on either side of the transaction. 
As a rule, the weaker party still retains some mo- 
nopoly strength, and the price is determined at some 
intermediate point by the relative monopoly strength 
of buyer and seller. In other words, the upper and 
lower limits of prices being determined by marginal 
utility and marginal disutility, the price approaches 
the former if, with the Austrian school, we assume 
that the producers have the monopoly advantage, and 
approaches the latter if, with the orthodox school, we 
assume that the consumers have the monopoly advan- 
tage. It would, of course, greatly simplify the mat- 



58 



VALUE AND DISTRIBUTION. 



ter if we could solve all our problems in terms of one 
or the other of these variables, but, unfortunately, the 
phenomena are too complex for any such solution. 
The best that can be hoped for is a determination be- 
tween the limits of marginal utility and marginal 
disutility. At what intermediate point the price will 
actually be fixed is not given to us to say, for this de- 
pends upon the relative monopoly strength of the con- 
testants, and so upon an indeterminate element. 

23. The Diagram of the Austrian Economists. — In 
conclusion, it may be said that the entire discussion 
resolves itself into the question, May or do marginal 

consumers' surpluses arise? 



Fig 5. 



Consumers 

Surplus 



.Producers Marginal 
Surplus 



Producers Differential 
Surplus 



Differential Cost 



The advocates of marginal 
utility assume, for the most 
part unconsciously, that 
they do not arise in the 
bulk of the world's ex- 
change. This is brought 
out very clearly in Fig. 5, 
a diagram which S. N. 
Patten employs to such 
good purpose. In this the 
consumer's surplus is always represented as a tri- 
angle or as a differential surplus, the total rectangle 
or marginal surplus being given to the producers. 
(See " The Theory of Dynamic Economics," p. 91.) 
24. Diagram of the Monopoly Theory of Price. — 
My own contention is that this scheme of distribu- 
tion involves the assumption that there are no non- 



Dowest Cost 



THE MONOPOLY THEORY OF PRICE. 



59 



Fig. 6. 



Consumers 
Differential Surplus 



competing groups among consumers, or that among 
them we have an ideal condition of free competition. 
The obligation cer- 
tainly rests upon 
the Austrian school 
to show that this 
is true. If it is 
not true, then the 
marginal surplus 
will be divided, as 
is shown in Fig. 6, 
between consumers 
and producers in 
accordance with their relative monopoly strength.* 



Consumers 
Marginal Surplus 



Producers 
Marginal Surplus 




Differential Cost 



Lowest Cost 



II. THE PRICE OF COMPLEMENTARY GOODS. 

Thus far in examining the various phenomena of 
value the discussion has been confined to the deter- 



*It is well known that the promulgation of the marginal 
utility theory of value gave a strong impulse to the mathe- 
matical treatment of problems in economic theory. Of course, 
protests against this have been made on the ground that the 
subjective utilities are not capable of exact measurement. 
What is really meant by this is, that the subjective phenomena 
of value are not capable of exact measurement in the terms 
of the objective phenomena of price. For, as has been shown, 
the subjective and objective phenomena are never in exact 
correspondence except in the case of normal value. From 
this it follows that economics cannot be treated as an exact 
science, though certain laws or tendencies may be more or 
less clearly determined. 



60 VALUE AND DISTRIBUTION. 

ruination of the price of a single good. It will now 
be necessary to consider the phenomena in which 
several productive goods enter into the creation of a 
resulting consumption good. 

We have here a case of the phenomenon that 
Menger has so happily characterized as "Comple- 
mentary Goods." The pleasure that may be realized 
from the resulting consumption good is dependent 
upon our possession of each and all of the comple- 
mentary productive goods. Hence in parting with 
one of the latter we lose not only the pleasure that 
would result from the direct consumption of that 
single commodity, but also an additional pleasure 
due to the importance of this single good to the com- 
plementary group of which it forms an essential part. 
In other words, a single commodity when it becomes 
a part of such a group has, as it were, two marginal 
utilities or values. This raises the question, Which 
of these, or what combination of these, determines 
the price of this productive good ? 

25. The Confusion in the Austrian Treatment of 
Complementary Goods. — Bohm-Bawerk insists most 
strenuously that even in this connection marginal 
utility is the all-sufficient determinant of value and 
price. He writes, " It is easy to see that the intimate 
corelation of complementary goods — the corelation in 
which they afford this utility — will be reflected in the 
formation of their value. This leads to a number of 
peculiarities, all, however, occurring within the limits 
of the universal law of marginal utility." (" Positive 



THE MONOPOLY THEORY OF PEICE. gl 

Theory of Capital," p. 170.) But, since such goods 
have two marginal utilities, the question naturally 
arises, Which of these determines their price ? 

Menger holds that the price of such good is deter- 
mined by the sum of the two utilities. Menger's de- 
fence of this contention might prove very interesting. 

Wieser tells us that " The imputation of the pro- 
ductive contribution assigns in this way to every 
productive good a medium share. To calculate the 
productive contribution, and therefore also the value 
at this medium amount, is sound common sense." 
(" Natural Value," p. 93.) 

26. Complementary Goods an Ordinary Case of 
Scarcity Price. — Here, as elsewhere, appeals to 
"common sense" are to be viewed with suspicion. 
The difficulty which the Austrian economists find 
in the case of complementary goods is due to the 
fact that in their general discussion of value and 
price they have labored to eliminate the determina- 
tion between limits, and to show that both value and 
price depend in last resort upon the marginal utility 
of the good to the consumer or buyer. Hence, when 
they came to the question of complementary goods, 
they thought they had found an exceptional compli- 
cation, for it was clear that in this case the marginal 
utility to buyer and seller only set limits within 
which the price may vary. And so, without further 
analysis, we are told that the price is fixed at the 
middle point between these limits, or that it is "a 
medium amount." 



62 VALUE AND DISTRIBUTION. 

As a matter of fact we here have a case of every- 
day scarcity price. The owner of the other pro- 
duction goods necessary to the complementary group 
arid the owner of the single good that is likewise 
necessary to the completion of this group stand over 
against each other as the prospective buyer and seller 
of the single good. Here, as in every instance of 
scarcity price, the marginal utility of the good to the 
buyer and its marginal utility to the seller fix the 
upper and lower limits of the price. At what point 
the price will actually be fixed depends upon the 
relative monopoly strength of the parties to the 
transaction. The price, therefore, is incapable of re- 
duction under any definite law save when the single 
good is freely reproducible. In every other instance 
the price depends on the relative monopoly strength 
of buyer and seller. It is in this way, and in this 
way alone, that every good that enters into a com- 
plementary group has its share in the joint product 
determined. From this it is manifest that comple- 
mentary goods are not a complication that demands 
a special analysis. Instead they are included under 
the ordinary and prevailing case of scarcity price. 



CHAPTER VI. 

VALUE AND PRICE. 

Nothing has interfered more seriously with the 
popular acceptance of the Marginal Utility Theory 
than the formidable appearance of the terms employed 
by its advocates, — to wit, subjective use value, subjec- 
tive exchange value, and objective exchange value. 
Indeed, no one can deplore more earnestly than the 
Austrians themselves the cumbersome terminology 
which seems to be necessitated by their analysis of 
value and price. Bohm-Bawerk writes : " I frankly 
confess that I would gladly exchange these pedantic 
and clumsy expressions for terms more euphonious 
and popular, if they could be got to indicate the 
opposition referred to with even approximate cor- 
rectness. But I have not been able to find such 
expressions. The words Use Value and Exchange 
Value are not suitable at all, because, as we shall 
see, there is a Subjective Exchange Value.* 

The source of the difficulty is here clearly indi- 
cated. It is the existence of certain phenomena to 
which Bohm-Bawerk has given the name " Subjec- 
tive Exchange Value." I would, however, urge that 
the elevation of this phenomenon into the same rank 



* Positive Theory of Capital, p. 130. 

63 



g4 VALUE AND DISTRIBUTION. 

with Subjective Use and Objective Exchange Value 
is unnecessary, and tends to obscure the important 
distinction between the subjective and objective phe- 
nomena which the Austrians have labored so zealously 
to establish. 

27. Subjective Exchange Value is not a Primary- 
Phenomenon of Value. — First let us be entirely clear 
as to what is here meant by Subjective Exchange 
Value. Let us assume that tobacco, when I smoke 
it myself, has a marginal utility of 4. It may, how- 
ever, happen that I can exchange the tobacco for 
wheat with a marginal utility of 8. Under such cir- 
cumstances the actual value of the tobacco will be 8. 
Here 4, or the marginal utility of the tobacco when 
directly consumed by myself, is its subjective use 
value; while the marginal utility which I secure 
by exchanging the tobacco for wheat is the subjective 
exchange value of the tobacco, which in this instance 
is 8. Or as Bohm-Bawerk puts it, the value of the 
tobacco is here determined by the marginal utility 
of a foreign class of goods. 

There are several serious defects in the reasoning 
employed in the discussion of this part of the sub- 
ject. One noticed by Bohm-Bawerk himself is the 
speaking of two marginal utilities for the same com- 
modity. This at one and the same time and to 
one and the same person is manifestly impossible. 
Again, it may well be questioned whether it is true 
that the value of any consumption good is in last 
resort determined by the marginal utility of a " for- 



VALUE AND PRICE. 05 

eign class of goods." What we really do is to ex- 
change tobacco at 4 for wheat at 8 until the supply 
of tobacco is so reduced that its marginal utility has 
been raised to 8. 

But all this aside, we fail to see that B6hm-Ba- 
werk has anywhere justified his elevation of " Sub- 
jective Exchange Value" to the rank of a primary 
phenomenon of value. In the chapter in which he 
seeks to establish this rank for subjective exchange 
value the burden of the argument is devoted to an 
effort to show that this phenomenon is essentially dif- 
ferent from that of objective exchange value. This 
we freely grant, and for the reason urged, that one is 
a subjective and the other an objective phenomenon. 
But we fail to see that he has anywhere shown that 
any such fundamental difference exists between sub- 
jective use value and this so-called subjective ex- 
change value. 

The difference between the direct and indirect use 
of a commodity may or may not be of sufficient im- 
portance to justify their recognition as subdivisions 
of use value, just as we recognize normal and mar- 
ket price as subdivisions of objective exchange value. 
But I fail to find any sufficient reason for elevating 
the indirect use or subjective exchange value to the 
rank of a primary phenomenon of value. 

28. Use and Exchange Value versus Value and 
Price. — Subjective exchange value being thus elimi- 
nated as a primary phenomenon, we are, by Bohm- 
Bawerk's own statement, brought back to the older 



66 VALUE AND DISTRIBUTION. 

and less cumbersome terms, use value and exchange 
value. We have now to inquire as to the expediency 
of including such essentially different phenomena 
under the common term value. Wieser writes : " It 
must be emphasized that the word value alters its 
original meaning somewhat when transferred from 
the subjective relations to wants to the objec- 
tive relations to price." ("Natural Value," p. 51.) 
Why, then, I would ask, must we continue to in- 
clude both phenomena under the common term 
value ? Would not the antithesis between these two 
concepts be more clearly apprehended if they were 
always known by essentially different names, one as 
value, the other as price? Even though a generic 
term that would include both phenomena is desira- 
ble, yet why should we confound the discussion by 
compelling the term value to perform this function ? 
As a matter of fact, it is much to be doubted whether 
anything is gained by the introduction of such a 
generic term. 

The only attempt in the writings of the Austrian 
economists to justify the continuance of " value" as a 
generic term is found in the following passage from 
Bohm-Bawerk: "The two groups of phenomena to 
both of which popular usage has given the ambigu- 
ous name ' Value' we shall distinguish as value in 
the Subjective and value in the Objective sense." 
("Positive Theory of Capital," p. 130.) Now, while 
I would be among the last to break unnecessarily 
with the traditions of the past, yet it may fairly be 



VALUE AND PKICE. (37 

asked, Why continue a " popular usage" that in- 
volves us in a confessed ambiguity ? 

This substitution of the terms value and price for 
the more cumbersome terms subjective use value and 
objective exchange value is open to but one objection. 
That is, the fear that we may lose sight of the distinc- 
tion between value as a subjective and price as an 
objective phenomenon. The importance of this dis- 
tinction between the subjective and objective phe- 
nomena cannot be too strongly insisted upon, but it 
may well be questioned whether their inclusion 
under the common term value does not tend to ob- 
scure this distinction. I would therefore suggest that 
the term value be strictly confined to the subjective 
phenomena, and that the term price be similarly 
restricted to the objective phenomena. One is the im- 
portance of the good to the individual measured in 
terms of marginal utility. The other involves a 
compromise between two such subjective estimates, 
and is measured in the objective terms of the quan- 
tity of money or money commodity for which the 
good in question will exchange. The price, of course, 
always has some relation to the marginal utility or 
value of the good ; but the correspondence between 
value and price, as was shown in the previous chapter, 
is never exact save in the case of normal value and 
price. In general the marginal utility of the good to 
consumer and producer only establishes limits within 
which the price may vary. 



CHAPTER VII. 

COST AND PRICE. 

The Austrian economists hold that even in the 
case of freely reproducible goods " The law of costs 
is only an approximate law." And again, that " Costs 
are not the final but only the intermediate cause of 
value. In last resort they do not give it to their 
products, but receive it from them." ("Positive 
Theory of Capital," pp. 188, 189.) It will be neces- 
sary to examine these contentions with some care. 

I. THE LAW OF COST AND THE PRICE OF FREELY REPRO- 
DUCIBLE GOODS. 

The contention that even in the case of freely re- 
producible goods the law of cost is only an approxi- 
mate law will require some explanation. We have 
seen that one of the arguments urged against the cost 
theory of value was that even so-called freely repro- 
ducible goods are in reality scarcity goods during 
all the fluctuations of their price on either side of 
the normal. From this Bohm-Bawerk has elsewhere 
argued that freely reproducible commodities are ex- 
ceedingly rare, and hence the failure of the cost 
theory as a general theory of price. 

29. The Law of Cost is here an Exact Law. — 
It may be asked, however, if it is entirely fair to first 
show that these so-called freely reproducible goods are 
for a large part of the time scarcity goods, and then 

68 



COST AND PKICE. (39 

to employ the same argument to show that cost does 
not exactly determine the price of these so-called 
freely reproducible goods during the time that they 
are in reality scarcity goods. The goods are, at any 
given instant, either scarcity goods or freely repro- 
ducible goods. Under the former assumption we 
are constrained to admit that the law of cost does not 
give an exact determination of their price. It is, 
however, just as clear that during the interval that 
the price is at the normal point, or while these goods 
are freely reproducible, in any strict sense of this 
phrase the law of cost is not an " approximate law," 
but determines the price with absolute exactness. 

30. Cost is here a Direct Cause of Value. — The 
second of the above contentions, that " Even where 
the law of cost holds, costs are not the final but 
only the intermediate cause of value," is open to 
equally serious criticism. The argument upon which 
this contention is based is in brief as follows : Under 
modern conditions most goods are produced in an- 
ticipation of the market, hence the determination of 
the utility of the goods precedes in time the deter- 
mination of the disutility which men will endure in 
the production of the good. From this it is inferred 
that the causal relation is from marginal utility to 
cost. Some special complications are discussed in 
Bohm-Bawerk's chapter on " The Value of Produc- 
tive Goods," but the whole argument may fairly be 
resolved into an attempt to establish the above causal 
relation. 



70 VALUE AND DISTRIBUTION. 

So far as the present writer can see, this entire dis- 
cussion as to the precedence of utility or disutility in 
the determination of price is not only without any 
real profit, but is actually misleading. For no matter 
what the seeming order of precedence may be, the 
fact remains that in the case of freely reproducible 
goods (normal price) , the determination is contingent 
not upon one but upon two factors. It is true that 
the price of such good may be measured either in 
terms of marginal utility or of marginal disutility, 
but its determination depends upon the coincidence, 
of these two factors. (See Fig. 4, page 55.) 

When, therefore, the Austrian economists tell us 
that in last resort the value even of freely repro- 
ducible goods is determined by marginal utility and 
not by cost, the question certainly seems a pertinent 
one : What determines the point at which this mar- 
gin is fixed? The immediate answer is, of course, 
that it is fixed by the limitation of the supply of the 
commodity ; increase this supply, and, other things 
being equal, marginal utility declines. This, how- 
ever, only raises the further question, How or by 
what is the supply limited ? In the case of scarcity 
goods this limitation is clearly effected by indeter- 
minate monopoly influences ; but in the case under 
discussion, that of freely reproducible goods, the only 
limitation to the supply is found in the cost of the 
goods, or in the marginal disutility endured in their 
production. 

The error of the Austrian economists lies in the 



COST AND PRICE. 71 

assumption that in marginal utility we have a phe- 
nomenon that is incapable of further analysis, an 
assumption that is largely true so long as we confine 
ourselves to scarcity goods. But when we turn to 
freely reproducible goods it is clearly in order for us 
to inquire what determines this margin. If, for in- 
stance, in the equation v = xyv?e assume x to be fixed, 
then v will vary with y. It still remains, however, 
for us to inquire what determines x. This limiting 
element in the case of freely reproducible goods is 
clearly the marginal disutility incident to the pro- 
duction of the goods. 

II. THE LAW OF COST AND THE PRICE OF SCARCITY GOODS. 

Under this heading I will endeavor to show that, 
contrary to the teachings of the Austrians, cost plays 
an important part even in the determination of the 
price of scarcity goods. 

31. A Substitute always Possible. — I may em- 
ploy my resources either in the purchase of rare 
wine or in the purchase of a diamond, — which shall 
it be ? Manifestly that which for a given expendi- 
ture will yield the greatest utility. Let us assume 
that it is the rare wine. This raises the question, 
How under such circumstances do I determine the 
maximum amount which I will give for the wine? 
Clearly this is very seriously affected by the price at 
which I can secure the diamond. 

In other words, there is no good so unique or rare 
but that some substitute for it can be found. The 



72 VALUE AND DISTRIBUTION. 

difference between the freely reproducible and the 
rare good is not that a substitute can be found for 
one and not for the other, but that in the case of a 
freely reproducible good an entirely equivalent sub- 
stitute can be found, while in the rare good the sub- 
stitute is not entirely equivalent. It is nevertheless 
true that in determining the price of either kind of 
good we necessarily have in mind the cost of the 
next best substitute. In the case of freely repro- 
ducible goods, this cost of the substitute fixes the 
price of the desired goods with absolute exactness. 
In the case of scarcity goods, no such exact deter- 
mination is possible, for we are manifestly willing 
to give for the desired good not only the cost of 
the next best substitute, but, in addition to this, 
an allowance for the greater utility of the desired 
good.* 

That this is the mental process through or by 
which we determine what, if need be, we are willing 
to give for any rare good the most cursory intro- 
spection will reveal. The reason for adopting this 
method is likewise manifest. It lies in the indefinite 
and unsatisfactory character of all subjective esti- 
mates. This compels us to adopt some more tangible 
and objective method, even though, as in the case in 
hand, we seem to further complicate the problem by 
introducing a second subjective estimate, — the mar- 
ginal utility of the proposed substitute. 

* See Clark's Philosophy of Wealth, p. 104. 



COST AND PRICE. 73 

32. The Substitute is in Last Resort a Freely Re- 
producible Good. — As this substitute is in last resort 
a freely reproducible commodity, its marginal utility 
may be measured in the terms of price. Hence to 
this extent the value or subjective estimate of a 
scarcity good finds exact objective expression. This, 
however, does not represent the total price of such 
scarcity goods, for as was seen, we are willing to pay 
something in addition for its superior advantages. 
In our endeavor to measure the difference between 
the marginal utility of the scarcity good and the 
marginal utility of its substitute, we are limited to 
the methods that are applicable to subjective phe- 
nomena. Hence inexact and tentative results alone 
are possible. The point at which the price is ac- 
tually fixed depending in this case upon the relative 
monopoly strength of buyer and seller. 



CHAPTER VIII. 

DISTRIBUTION AND THE THEORIES OP UTILITY, 
VALUE, AND PRICE. 

Not the least of the many valuable contributions 
of the Austrian economists is their clear exposition 
of the intimate relation that exists between the phe- 
nomena of value and price on the one hand and the 
phenomena of distribution on the other. All know 
that primarily the problem of distribution is to de- 
termine how the price of commodities is divided 
among the several parties to the transaction. Yet, 
despite this, we are prone to lose sight of the very 
intimate relation that exists between the phenomena 
of distribution, value, and price. 

33. Society is interested in the Increase of Total 
Utility. — One of the first points that must be clearly 
recognized in this connection is the fact that society 
as a whole is not primarily interested either in the 
increase of total value, value per unit, or price, but 
is interested in the increase of total utility. (See 
page 38.) For if this is not true, then all that is 
necessary to increase the happiness of mankind is to 
decrease the supply of pleasurable commodities and 
so raise their marginal utility. (See Fig. 2, page 
37.) 

As a matter of fact, however, total value and total 
utility frequently increase together, and in such in- 

74 



DISTRIBUTION AND UTILITY, VALUE, AND PRICE. 75 



stances society can find guidance in its economic 
conduct in the terms of total value. This, of course, 
has the great practical advantage that total value is 
more readily computed than total utility. For while 
total utility can only be determined by the summa- 
tion of a long series of marginal utilities, total value 
is simply the product of the quantity of commodity 
by its final marginal utility. 

34. The Individual is interested in the Increase 
of Total Value. — As a matter of fact, however, this 
increase of total value parri passu with the increase 
of total utility is not realized except under the as- 
sumption of free competition : hence it is not a uni- 
versal or even a general experience. It might, for 
instance, very readily happen that an increase in the 
supply of a commodity beyond a certain point would 
cause a very rapid decline not only in the marginal 
utility or value per 
unit but also in the 
total value. This is 
shown graphically in 
Fig. 7, where with a 
supply represented by 
OA the total value is 
the area OAUF, while 
an increase, AM, to 
the supply results in 
the total value repre- 
sented by the much smaller rectangle, OMNE; on 
the other hand, the total utility increases from the 



Fig. 7. 




76 YALUE AND DISTRIBUTION. 

area OAUY to OMNUY, or increases by the area 
AMNU. If, therefore, the primary interest of so- 
ciety is in the increase of total utility, it becomes 
manifest that total value is not a safe guide. 

By reference to page 41 it will be seen that the 
above graphic illustration is the same figure that 
was employed in the discussion of the practice of the 
Dutch East India Company in destroying a portion 
of their crops in order to enhance the marginal 
utility and so the price of the balance. In other 
words, the interests of society and the interest of the 
individual may be at serious variance. The interests 
of society are best subserved by increasing the total 
utility or the supply of all useful commodities ; or, 
rather, in approximating the condition of free com- 
petition. The interest of the individual controlling 
the supply of any one commodity is in the direction 
of increasing its value and price, and so diverting a 
larger share of the general social product to his own 
peculiar advantage. Or, stated in a more familiar 
way, society desires free competition in all commodi- 
ties, the individual desires free competition in all 
commodities save the one that he supplies. 

This, indeed, is the scientific basis of Proudhon's 
attack upon existing conditions and of his claim that 
only by a socialization of all industrial operations 
could this source of evil be eliminated. Our present 
interest, however, is not in the equity of the case, but 
to show the very intimate relation that exists between 
the phenomena of utility, value, and price on the 



DISTRIBUTION AND UTILITY, VALUE, AND PRICE. 77 

one hand and the phenomena of distribution on the 
other. 

35. Disadvantages of the Orthodox Attitude. — 
The Austrians were singularly happy in their ex- 
position of this part of the subject, and rightly in- 
sisted that the orthodox economists were at serious 
fault. Wieser writes : " The classical political econ- 
omy really examines only the value of products, or, 
more exactly, of produced consumption goods. So 
far as factors of production are concerned, it looks 
upon them, on the one side, as sources of income 
(rent, interest, wages, and perhaps also under- 
taker's income) ; on the other side, as the elements 
which go to form the cost of production, and are 
considered to decide principally the value of the 
products." * 

The objection here implied to the older treatment 
of distribution is largely based upon the antagonism 
of the Austrian economists to the classical theory of 
value. This is shown in the concluding lines of the 
paragraph just quoted. The Austrian economists 
have, therefore, endeavored to treat the problem of 
distribution in a way that is more in touch with 
their own theory of value. The fundamental ques- 
tion with them is not to determine the share of the 
social product that accrues to the several factors of 
production, but instead to determine the share that 
accrues to the several productive goods which enter 

* Natural Yalue, p. 71. 



78 YALUE AND DISTRIBUTION. 

into the complementary group that is necessary to 
the creation of the consumption good. 

36. Advantages and Disadvantages of the Aus- 
trian Attitude. — The difference in method may not 
at first sight seem important, and it may well be 
that in last resort they might be made to yield the 
same result. It is nevertheless true that the latter 
method establishes a much more intimate connec- 
tion between the theory of value and the theory of 
distribution. This has the great advantage that it 
gives a unity or coherence to economic theory as a 
whole, which seemed sadly lacking under the older 
method of treating the problem of distribution. But 
while the newer method undoubtedly enjoys this 
great advantage, yet its employment is attended with 
a corresponding disadvantage. The Austrians have 
labored to show that freely reproducible goods are 
rather the exception than the rule ; and so long as 
we confine ourselves to the consideration of concrete 
commodities much may be said in favor of this con- 
tention. Once persuaded of this, we are apt to dis- 
miss the phenomena of normal value as of little 
moment in any discussion of distribution, when as 
a matter of fact normal surpluses are of primary 
importance in that discussion. We have already 
referred to this in the Introduction, but must defer 
its full explication to a much later chapter. (See 
Sections 113 to 115.) 

In the present volume we will endeavor not to lose 
sight either of the intimate relation that subsists be- 



DISTRIBUTION AND UTILITY, VALUE, AND PRICE. 79 

tween the phenomena of value and distribution or of 
the important part played by the several factors of 
production, — land, entrepreneur, capital, and labor. 
In other words, starting from the phenomenon of 
price as the concrete fact presented for analysis, we 
shall endeavor to formulate the laws by which the 
several forms of surplus, rent, profit, interest on capi- 
tal, and gain of labor are determined. 



PART II. 
DISTRIBUTION. 



81 



BOOK I.-RENT. 



CHAPTER I. 

THE RENT OP LAND. 

The earliest writers upon economic questions in- 
cluded all payments to a landlord under the term 
rent. In this, of course, they simply followed the 
practice of every-day life. That rent so denned is a 
complex return they probably realized, for the most 
cursory examination of this return reveals not only 
a payment for the use of the land itself but also an 
amount that is in reality interest on the money in- 
vested in permanent improvements. Despite this, 
however, the pre-Smithian economists continued to 
employ the term rent in the above described way to 
the confusion of their own minds as well as to the 
confusion of their readers. 

I. FUNDAMENTAL PROPOSITIONS. 

37. An Agrarian Doctrine. — With the rapid de- 
velopment of England's manufacturing interests in 
the last half of the eighteenth century conditions 
were developed that compelled an analysis of the 
complex return to which laymen had given the name 

83 



84 VALUE AND DISTRIBUTION. 

rent. Those who held that the future greatness of 
England depended upon the development of her 
manufacturing interests saw that these interests were 
very seriously affected by the rate of wages, and that 
this again, under the prevailing standard of life, de- 
pended very largely upon the price of food. From 
this it was an easy step to the conclusion that the 
high rents secured by the landlords were a serious 
impediment to the growth of the manufacturing in- 
terests, and so to the future greatness of England. 
This, of course, put the agrarians upon the defensive, 
and the defence which they set up was that high 
rents do not in any way affect the price of corn, and 
so do not affect the rate of wages. 

38. Bent does not enter into the Determination 
of Price. — In support of this contention it was urged 
that the price of wheat must always be high enough 
to pay the cost of production on the poorest farm 
that is maintained in cultivation. Rent, it was said, 
is the surplus secured by those who have more 
efficient farms (farms that are more fertile or that 
are nearer the market) : hence rent does not de- 
termine price, but is determined by price. Rent so 
denned is, of course, an entirely different concept 
from the rent of every-day language. It clearly ex- 
cluded all interests on the cost of improvements, and 
was supposed to include only payments for "the 
original and indestructible powers of the land." 
The following graphic illustration may serve to make 
the thought a little clearer. 




THE RENT OF LAND. 85 

39. Diagram of Rent. — As the number of farms 
growing wheat is very large, and as it is possible 
that no two are of 
exactly equal effi- 
ciency in the pro- 
duction of wheat, 
we can conceive of 
them as arranged 
in a series of increasing difficulty or non-efficiency 
in production. In Fig. 8 OH represents the cost or 
disutility of production on the most efficient farm, 
while MN represents the cost or disutility on the 
least efficient farm, that must be maintained in cul- 
tivation in order to insure a given supply of corn. 
Now, it was the contention of those who sought to 
defend the agrarian interests that the price of wheat 
must equal the cost, MN, or the supply of corn 
would decrease ; for the marginal producer, or he 
who produces at the greatest cost, will not continue 
to produce if he does not at least secure an amount 
that will cover his cost. In other words, the price 
of wheat is determined quite independently of the 
rent of the more efficient farms here represented by 
HE and DG. Not only so, but the price must first 
be fixed by the cost on the poorest farm before we 
can determine the rent of the better farms. Hence, 
rent is determined by price and not price by rent. 
At MN cost and price are equal. This is the case 
of a no-rent farm. 

The diagram usually employed to illustrate the 



Fig. 9. 



gQ VALUE AND DISTRIBUTION. 

doctrine of rent is given in Fig. 9. It brings out 
with great clearness the fact that the rent of a given 
piece of land is the difference in its productivity 
and the productivity of the poorest land in the cul- 
tivation for the production of the same commodity. 
If the productivity of the various farms are repre- 
sented by ordinates, a line drawn through their upper 
extremities would descend from the productivity of 
the best land, represented by OF, to the productivity 
of the poorest land, represented by MN. The total 
rent arising from the production of this commodity 
is the area FNE, which corresponds with the area 
HNE in Fig. 8. In the case of intensive culti- 
vation the area FNE or 
HNE represents the rent 
of a particular farm. Fig. 
8 has the advantage of 
bringing out in a clear 
and distinct way the fun- 
damental concept that underlies the doctrine of rent, 
— to wit, Price is determined by the greatest or mar- 
ginal cost. 

From this it is clear that the advocates of this doc- 
trine of rent were right when they claimed that the 
causal relation was not from rent to price but from 
price to rent. In other words as here denned, rent 
does not enter into the determination of the price of 
wheat, and so does not interfere with the manufactur- 
ing interests by raising the cost of living and so the 
rate of wages. In conclusion, I would say that there 




THE KENT OF LAND. 87 

is absolutely no hope for any firm grasp of the most 
elementary problems of economic theory until this 
fundamental concept, that rent is a surplus which 
does not enter into the determination of price, has been 
made part of our intellectual furnishing. Again, it 
must ever be borne in mind that this proposition 
rests upon the further contention that in the case of 
freely reproducible goods price is determined by the 
greatest or marginal cost of production. It may be 
well to preface our review of the writers who have 
contributed to this part of economic literature by a 
brief enumeration of the several propositions that 
are usually regarded as essential parts of the doc- 
trine of rent. 

40. Rent due to Difference in Fertility and Dis- 
tance from Market. — Rent is due to differences in 
the efficiency of the various farms, or, as it is usually 
stated, to differences in fertility and distance from 
market. Lying back of this proposition we find the 
assumption that with the increase in population men 
are forced to employ less and less fertile land. It has 
been objected to this that it does not correspond to 
the actual order in which land is brought into culti- 
vation. In new countries the best land frequently 
remains uncultivated for lack of sufficient capital to 
drain it, etc. A slight change in the ordinary state- 
ment of the doctrine of rent will meet this difficulty. 
For, capital and technical skill remaining the same, 
men will always cultivate the more efficient land 
first. 



88 YALUE AND DISTRIBUTION. 

41. Law of Diminishing Returns. — It was not 
long before it was seen that in the extension of culti- 
vation men might either have recourse to new and 
less efficient land or they might expend more capital 
and labor upon the land already in cultivation. At 
bottom these amount to one and the same thing;. 
This method of intensive cultivation, however, sug- 
gests the possibility of an increase in cultivation by 
differential increments, a concept that has some im- 
portant theoretical advantages, and is regarded by 
some modern economists as the typical case of rent. 
In either case an addition of capital and labor may, 
up to a certain point, yield an increasing return, but 
after reaching that point a given expenditure of capi- 
tal and labor yields a diminishing return. 

42. Effect of Improvements. — It was also seen 
that this tendency to a diminished return and the rent 
consequent therefrom might be offset by all causes, 
such as improvements in transportation, etc., that 
tend to reduce the difference in cost between the more 
efficient and the least efficient or marginal land. It 
was further seen that the influences that tend to re- 
duce this difference in cost are more generally real- 
ized in manufactures than in agriculture. 

It appears, then, that in our review of those writers 
who have been active in the promulgation of the doc- 
trine of rent we should look for some recognition of 
the following concepts : 

Differences in fertility and access to market, or, 
better, differences in efficiency of land. 



THE KENT OF LAND. 89 

The law of diminishing return and the effect of 
improvements. 

Greatest cost determines price and price deter- 
mines rent. This last contention, that price deter- 
mines rent, is, in brief, the doctrine of rent. 

II. HISTORICAL DEVELOPMENT OF THE DOCTRINE OF RENT. 

43. Adam Smith. — It is not difficult to find iso- 
lated passages in "The Wealth of Nations" that 
seem to justify the claim that the doctrine of rent, 
as applied to land, found clear and explicit state- 
ment at the hands of Adam Smith. In the first 
place, he clearly recognizes not only that difference 
in fertility and distance from the market are sources 
of rent, but that these are offset by increased facilities 
in transportation. (See Book I. Chap. XI. Part I.) 

Again, he writes : " Rent, it is to be observed, 
therefore, enters into the composition of the price of 
commodities in a different way from wages and profit. 
High or low wages and profit are the cause of high 
or low price ; high or low rent is the effect of it. It 
is because high or low wages and profit must be paid, 
in order to bring a particular commodity to market, 
that its price is high or low ; but it is because its 
price is high or low, a great deal more, or very little 
more, or no more, than what is sufficient to pay those 
wages and profit, that it affords a high rent, a low 
rent, or no rent at all." (" The Wealth of Nations," 
Book I. Chap. XI.) 

But while Smith seems to see quite clearly that 



90 VALUE AND DISTRIBUTION. 

rent does not enter into the determination of price, 
he is not so clear on the proposition upon which in 
last resort the law of rent is based, — namely, that 
price is determined by the greatest or marginal cost 
of production. This is shown in the following 
passage : 

" As the price both of the precious metals and of 
the precious stones is regulated all over the world by 
their price at the most fertile mine in it, the rent 
which a mine of either can afford to its proprietor is 
in proportion not to its absolute, but to what may be 
called its relative fertility, or to its superiority over 
other mines of the same kind." (" The Wealth of 
Nations," Book I. Chap. XI. Part II.) 

While he here recognizes that the rent of such 
mines is due to " their superiority over other mines 
of the same kind," he confounds the argument by 
saying that " the price of these commodities is regu- 
lated all over the world by their price at the most 
fertile mines in it" 

44. Criticism of Smith. — Passages like the above 
led those who immediately followed Smith to con- 
clude that he did not have a firm grasp upon the 
doctrine of rent. 

Kicardo writes : " Adam Smith sometimes speaks 
of rent in the strict sense to which I am desirous 
of confining it, but more often in the popular sense 
in which the term is usually employed. . . . He also 
speaks of the rent of coal-mines and of stone-quar- 
ries, to which the same observation applies, — that the 



THE BENT OF LAND. 91 

compensation given for the mine or quarry is paid 
for the value of the coal or stone which can be re- 
moved from them, and has no connection with the 
original and indestructible powers of the land." * 

Malthus writes : " Adam Smith, though in some 
parts of the eleventh chapter of his first book he 
contemplates rent quite in its true light, and has 
interspersed through his work more just observations 
on the subject than any other writer, he has not ex- 
plained the most essential cause of the high price of 
raw produce with sufficient distinctness, though he 
often touches upon it ; and by applying occasionally 
the term monopoly to the rent of land, without stop- 
ping to mark its more radical peculiarities, he leaves 
the reader without a definite impression of the real 
difference between the cause of the high price of the 
necessaries of life and of monopolized commodities." f 

45. Anderson. — The first to give us a full and 
fairly complete statement of the doctrine of rent as 
applied to land was Dr. James Anderson, who in 
1777 published a tract entitled "An Inquiry into the 
Nature of the Corn Laws." In this he writes : J " I 
foresee here a popular objection. It will be said 
that the price to the farmer is so high only on ac- 
count of the high rents and avaricious extortions of 

* Eieardo's Principles of Political Economy, Bonn edition, 
p. 45. 

•j" An Inquiry into the Nature and Progress of Eent, p. 3. 

J This is taken from the abstract in Overctone's reprint of 
rare tracts. 



92 VALUE AND DISTRIBUTION. 

proprietors. ' Lower (say they) your rents, and the 
farmer will be able to afford his grain cheaper to the 
consumers.' But if the avarice alone of the pro- 
prietors was the cause of the dearth of corn, whence 
comes it, I may ask, that the price of grain is always 
higher on the west than on the east coast of Scot- 
land? Are the jDrojDrietors in the Lothians more 
tender-hearted and less avaricious than those of 
Clyddesdale? The truth is, nothing can be more 
groundless than these clamours against men of 
landed property. There is no doubt but that they, 
as well as every other class of men, will be willing 
to augment their revenue as much as they can, and 
therefore will always accept of as high a rent for 
their land as is offered to them. Would merchants 
or manufacturers do likewise? Would either the 
one or the other of these refuse, for the goods he 
offers for sale in a fair open way, as high a price as 
the purchaser is inclined to give ? If they would 
not, it is surely with a bad grace that they blame 
gentlemen for accepting such a rent for their land as 
farmers, who are supposed always to understand the 
value of it, shall choose to offer them. . . . 

" It is not, however, the rent of the land that deter- 
mines the price of its produce, but it is the price of 
that produce which determines the rent of the land. 

" In every country there is a variety of soils, dif- 
fering considerably from one another in point of 
fertility. These we shall at present suppose ar- 
ranged into different classes, which we shall denote 



THE RENT OF LAND. 93 

by the letters A, B, C, D, E, F, etc. ; the class A 
comprehending the soils of the greatest fertility, and 
the other letters expressing different classes of soils, 
gradually decreasing in fertility as you recede from 
the first. Now, as the expense of cultivating the 
least fertile soil is as great as or greater than that 
of the most fertile field, it necessarily follows that if 
an equal quantity of corn, the produce of each field, 
can be sold at the same price, the profit on culti- 
vating the most fertile soil must be much greater 
than that of cultivating the others, and as this con- 
tinues to decrease as the sterility increases, it must 
happen that the expense of cultivating some of the 
inferior classes will equal the value of the whole 
produce." This Anderson assumes to be the case in 
class F, and concludes that " the utmost avarice of the 
proprietor cannot in this case extort a rent from this 
class." Farmers in the other class could of course 
afford to pay a rent. " Nor would the proprietors of 
these fields find any difficulty in obtaining these 
rents ; because farmers, finding they could live 
equally well upon such soils, though paying these 
rents, as they could upon the fields without any rent 
at all, would be equally willing to take the one as 
the other." 

" Let us now suppose that the gentlemen of Clyd- 
desdale, from an extraordinary exertion of patriot- 
ism and an inordinate desire to encourage manufac- 
tures, should resolve to lower their rents, so as to 
demand nothing from those who possessed the fields 



94 VALUE AND DISTRIBUTION. 

E, as well as those of the class F, and should allow 
the rents of all the others to sink in proportion ; 
would the prices of grain fall in consequence of this ? 
By no means. The inhabitants are still in need of 
the whole produce of the field F as before, and are 
under the necessity of paying the farmer of these 
fields such a price as to enable him to cultivate them. 
He must, therefore, still receive fourteen shillings per 
boll as formerly. And as the grain from the fields 
E D C B and A are at least equally good, the occu- 
piers of such of these fields would receive the same 
price for their produce. The only consequence, then, 
that would result from this quixotic scheme would 
be the enriching one class of farmers at the expense 
of their proprietors, without producing the smallest 
benefit to the consumers of grain, — perhaps the re- 
verse, as the industry of these farmers might be 
slackened by this measure. 

" If, on the other hand, by any political arrange- 
ment, the price of oatmeal should be then reduced 
from fourteen to thirteen shillings per boll, it would 
necessarily follow that all the fields of the class F 
would be abandoned by the plough, and the rents of 
the others would fall, of course ; but with that fall of 
rent the quantity of grain produced would be dimin- 
ished, and the inhabitants would be reduced to the 
necessity of depending on others for their daily 
bread. Thus it appears that rents are not at all 
arbitrary, but depend on the market price of grain ; 
which, in its turn, depends upon the effective de- 



THE RENT OF LAND. 95 

mand that is for it, and the fertility of the soil in 
the district where it is raised : so that the lowering 
of rents alone could never have the effect of render- 
ing the grain cheaper.'' 1 We here have a clear rec- 
ognition of the two essential propositions that price 
is determined by the greatest or marginal cost, and 
that price determines rent instead of being deter- 
mined by rent. So, too, in this first elaboration of 
the doctrine of rent, we find it set up as the defence 
of the agrarian interest against the growing demands 
of the manufacturing interest. 

Despite the clear enunciation in Anderson's tract 
of fundamental concepts involved in the doctrine of 
rent, nearly half a century elapsed before this doc- 
trine became an essential part of economic theory. 
It was not, indeed, until 1815 that Malthus, in " An 
Inquiry into the Nature and Progress of Kent," and 
Sir Edward West, in his essay on " The Application 
of Capital to Land," developed quite independently 
of each other and of Anderson the modern doctrine 
of the rent of land. 

46. Malthus. — This writer held that " The reason 
why the real price of corn is higher and continually 
rising in countries which are already rich, and still 
advancing in prosperity and population, is to be 
found in the necessity of resorting constantly to 
poorer land." (Page 44.) " The price of produce in 
every progressive country must be just about equal 
to the cost of production on land of the poorest quality 
in use ; or to the cost of raising additional produce 



96 VALUE AND DISTRIBUTION. 

on old land, which yields only the usual return of 
agriculture stock, with little or no rent." (Page 35.) 
" There is no just reason to believe that if landlords 
were to give the whole of their rents to their tenants 
corn would be more plentiful and cheaper." (Page 
57.)* 

Differences in fertility and distance from market 
are here clearly recognized as sources of rent. So, 
too, the propositions that greatest cost determines 
price and price determines rent. Again, the laws of 
Increasing and Diminishing Return are clearly ap- 
prehended by Malthus. For he writes : " Many of 
the questions, both in Morals and Politics, seem to be 
of the nature of the problem de maximis and minimis 
in Fluxions ; in which there is always a point where 
a certain effect is the greatest, while on either side 
of this point it gradually diminishes." (" Tract on 
the Effects of the Corn Laws," p. 32.) 

47. West. — Sir Edward West's formulation of the 
doctrine of rent differs but little from that just ex- 
amined. 

West writes : " When in the progress of improve- 
ment new land is brought into cultivation recourse 
is necessarily had to poor land, or to that at least 
which is second in quality to what is already culti- 
vated." (Page 9.) 

Again, "The additional work bestowed on land 
must be expended either in bringing fresh land into 

* An Inquiry into the Nature and Progress of Eent. 



THE KENT OF LAND. 97 

cultivation or in cultivating more highly that already 
in tillage. In every country the gradations between 
the richest land and the poorest must be innumer- 
able. The richest land, or that most conveniently 
situated for a market, will, of course, be cultivated 
first." (Page 9.) 

" It is the diminishing rate of return upon ad- 
ditional portions of capital bestowed on land that 
regulates, and almost solely causes rent." (Page 
49.) " The corn that is raised at the least expense 
will, of course, sell for the same price as that raised 
at the greatest, and consequently the price of all corn 
is raised by the increased demand. But the farmer 
gets only the common profits of stock in its growth, 
which is afforded in that corn which is raised at the 
greatest expense ; all the additional profit, therefore, 
on that part of the produce which is raised at a less 
expense goes to the landlord in the shape of rent." 
(Page 50.) 

It is manifest that West, like Malthus, recognizes 
all of the fundamental conceptions involved in the 
modern doctrine of rent as applied to land. Differ- 
ence in fertility and distance from market, the law 
of Diminishing Returns, and the effect of improve- 
ments are clearly set forth, while the propositions 
that price is determined by the greatest cost and that 
rent is determined by price are clearly enunciated. 

48. Ricardo. — Ricardo, whose " Principles" ap- 
peared shortly after the above papers by Malthus 
and West, recognized the importance of their con- 



98 VALUE AND DISTRIBUTION. 

elusions, and hastened to embody them in his system 
of distribution. In determining the cause of rent 
he follows the above writers very closely : " The 
most fertile and most favorably situated land will 
be first cultivated." (Page 49.) "If, then, good 
land existed in a quantity much more abundant than 
the production of food for an increasing population 
required, or if capital could be indefinitely employed 
without a diminished return on the old land, there 
could be no rise of rent." (Page 49.) 

Again, he writes : " Haw material enters into the 
composition of most commodities, but the value of 
that raw material, as well as corn, is regulated by 
the productiveness of the portion of capital last em- 
ployed on the land and paying no rent ; and there- 
fore rent is not a component part of the price of 
commodities." (Page 55.) 

He also gives us the following statement, in which 
the conditions under which rent arises are couched 
in the most general terms : " Rent is always the dif- 
ference between the produce obtained by the em- 
ployment of two equal quantities of capital and 
labor." 

Hicardo added but little to the doctrine of rent as 
formulated by Malthus and West ; he, however, em- 
bodied it in a scheme of distribution that was ac- 
cepted by English economists for many years after 
the publication of his " Principles," and so from this 
time on we hear only of Ricardo's law of rent, while 
the belief that in the cost of production we have the 



THE RENT OF LAND. 99 

true and only measure of value became even more 
firmly riveted upon the body of economic theory. 

49. Criticisms of Ricardo. — For more than half 
a century after the publication of Ricardo's " Prin- 
ciples" English literature was well-nigh barren of 
any valuable contribution to the doctrine of rent. 
Specific statements of Ricardo were objected to, and 
the objections sometimes sustained. For instance, his 
contention that the most fertile and most favorably 
situated land will be first cultivated does not agree 
with the facts as we find them in the settling of a 
new country, for men are frequently forced to culti- 
vate the less fertile land of the hill-side until capital 
has accumulated to allow them to drain the more 
fertile bottom lands. 

Again, he writes : " Rent is that portion of the 
produce of the earth which is paid to the landlord 
for the use of the original and indestructible powers 
of the soil." (Page 44.) This contention has been 
attacked on the ground that the only original and 
indestructible powers of the soil are the area on 
which to expose soil and plants to air, water, and 
sunshine, and it is agreed that in this sense land is 
so abundant that it could have no value. (See 
Clark, Quarterly Journal of Economics, 1891.) 

Ricardo's phrase, " the original and indestructible 
powers of the soil," is certainly far from happy ; it is, 
however, capable of a more liberal interpretation 
than that given in this criticism. What Ricardo 
intended to say was that before rent can arise not 



100 VALUE AND DISTRIBUTION. 

only the cost of production must be met, but also the 
cost of maintaining the land unimpaired in its fer- 
tility. Where this last deduction is not made the 
payment, as in the case of mines, is a royalty and not 
a rent. It is, indeed, in this very connection that 
Ricardo employed the terms to which Clark objects. 
He writes : " Compensation given for the mine or 
quarry is paid for the value of the coal or stone 
which can be removed from them, and has no con- 
nection with the original and indestructible powers 
of the land." 

Even the fundamental condition of a rent, that it 
does not enter into the determination of price but is 
determined by price, has not escaped attack. In- 
deed, so able a defender of the Bicardian faith as J. 
S. Mill has yielded to the attack at this point. He 
writes : " Rent is not an element in the cost of pro- 
duction of the commodity which yields it ; except in 
the case (rather conceivable than actually existing) 
in which it results from and represents a scarcity 
value. But when land capable of yielding rent in 
agriculture is applied to some other purpose, the rent 
which it would have yielded is an element in the cost 
of production of the commodity which it is employed 
to produce." (Book III. Chap. VI.) 

This is a practical admission of the claim of Ri- 
cardo's critics that there is no such thing as a no-rent 
land. If this is true, it follows that rent does enter 
into the determination of price. In other words, the 
law of rent is completely nullified. In Book II., 



THE BENT OF LAND. 101 

Chapter II., this statement of Mill, and likewise the 
contention that there is no no-rent land, will be ex- 
amined at some length. 

For the present I would urge that we must either 
dismiss the doctrine of rent as part of the antiquated 
lumber of our intellectual furnishing or hold fast to 
the proposition that rent is that surplus which does 
not enter into the determination of price, but is de- 
termined by price. 



CHAPTEK II. 

THE GENERAL DOCTRINE OP RENT. 

I. THE DOCTRINE IN ENGLISH ECONOMICS. 

The earlier English economists restricted them- 
selves almost entirely to a discussion of the doctrine 
of rent as applied to land. And yet from the very 
inception of the doctrine men recognized that its pri- 
mary and essential condition is that it does not enter 
into the determination of price but is determined by 
price. From this it is not far to the further conclu- 
sion that wherever such a surplus arises, whether in 
connection with land, labor, capital, or entrepreneur, 
we have a rent of the corresponding factor of produc- 
tion. And yet, despite the ease with which this 
further step in the argument may be taken, it was 
long delayed among English economists. Here and 
there we find an occasional reference to this general 
doctrine, but it was not until the last quarter of the 
present century that it found any general accept- 
ance. 

50. Whately on the General Doctrine of Rent. — 

This writer took occasion to declare that the rent of 

land is only one species of an extensive genus, and 

complained that English economists have regarded it 

as a genus by itself, and have either omitted its cog- 
102 



THE GENERAL DOCTRINE OF RENT. 103 

nate species from all consideration or have included 
them under genera to which they do not properly 
belong. But beyond entering this general complaint 
the Archbishop makes no further contribution to the 
literature of the subject. 

51. J. S. Mill on the General Doctrine of Rent. — 
Mill writes : " Cases of extra profit analogous to rent 
are more frequent in the transactions of industry than 
is sometimes supposed. Take the case, for example, 
of a patent or exclusive privilege for the use of a 
process by which cost of production is lessened. If 
the value of the product continues to be regulated 
by what it costs to those who are obliged to persist 
in the old process, the patentee will make an extra 
profit equal to the advantage which his process pos- 
sesses over theirs. This extra profit is essentially 
similar to rent, and sometimes even assumes the form 
of it; the patentee allowing to other producers the 
use of his privilege in consideration of an annual 
payment. . . . 

" The extra gains which any producer or dealer 
obtains through superior talents for business, or su- 
perior business arrangements, are very much of a 
similar kind. If all his competitors had the same ad- 
vantages, and used them, the benefit would be trans- 
ferred to their customers, through the diminished 
value of the article; he only retains it for himself 
because he is able to bring his commodity to market 
at a lower cost, while its value is determined by a 
higher. All advantages, in fact, which one competi- 



104 VALUE AND DISTRIBUTION. 

tor has over another, whether natural or acquired, 
whether personal or the result of social arrange- 
ments, bring the commodity, so far, into the Third 
Class, and assimilate the possessor of the advantage 
to a receiver of rent." (Appleton edition, pp. 585, 
586.) 

While this is far from a happy statement of the 
case, yet it clearly recognizes the general character 
of the rent function. 

52. Walker on the Rent of Entrepreneur. — That 
Walker has shown that the entrepreneur performs as 
distinct and important a service as capital or labor 
will hardly be questioned ; but what interests us 
most in this connection is his claim that the return 
secured by the entrepreneur follows the law of rent. 
He writes : " I shall now undertake to show that 
profits, the remuneration of the entrepreneur or 
employer, partake largely of the nature of rent, 
being a species of the same genus. So far as this is 
the case, profits do not form a part of the price of 
the products of industry." (" Political Economy," 
1888, p. 236.) As we shall have occasion to review 
this writer's contribution to this part of economic 
theory at some length in another chapter (see j)age 
135), a very brief notice at this point will be suffi- 
cient. In conclusion, we can only express regret 
that he did not follow his argument to its legitimate 
conclusion, and call the return — which confessedly 
follows the law of rent — the rent of the entre- 
preneur. 



THE GENERAL DOCTRINE OF RENT. 105 

53. Marshall on the Rent of Capital. — This rent, 
though now and again incidentally noticed in Eng- 
lish literature, receives its first full enunciation at 
the hands of Professor Marshall. He writes : " Let 
us suppose, then, that an exceptional demand for a 
certain kind of textile fabric is caused by, say, a 
sudden movement of the fashions. The special ma- 
chinery required for making that fabric will yield 
for the time an income which bears no direct rela- 
tion to the expenses of making the machinery ; but 
is rather a high Quasi-rent governed by the price 
that can be got for the produce, and consisting of the 
excess of the aggregate price of that produce over 
the direct outlay (including wear and tear) incurred 
in its production. . . . 

"Meanwhile such of the old machinery as is in 
good repair may perhaps be kept at work ; but the 
income which it earns will bear no direct relation to 
its own expenses of production ; it will be the small 
excess of the selling value of the produce made by 
it over the wear and tear and other direct outlay 
involved ; this income will be a Quasi-rent,* the 
value of which will be determined by the price of 

* Marshall accents the greater permanence of land rent, 
and so calls the differential earnings of capital " Quasi-rent." 
Many German economists, on the other hand, regard every 
differential gain as an unqualified rent without regard to its 
duration. As a matter of fact, the rent of land is only a little 
more permanent, as the recent reduction in rents, because of 
improvements in transportation, abundantly testify. 



106 VALUE AND DISTRIBUTION. 

the produce, and play no direct part in determining 
that price. . . . 

" Similar illustrations might be taken from any- 
other branch of business. Each branch has special 
features of its own ; but with proper modifications in 
detail the same general principle applies to all. In 
every case the net-income derived from the invest- 
ment of capital, when once that investment has been 
made, is a Quasi-rent." (Marshall's " Principles of 
Economics," pp. 469-471.) 

54. Clark and Hobson on the General Doctrine 
of Rent. — In the magazine literature of more recent 
years there is a growing tendency to regard rent as a 
general function, or as a surplus that may be realized 
by any and all factors of production. Indeed, there 
is some danger that its application will be extended 
beyond its legitimate limits. This is notably the case 
with an article by J. B. Clark in the Quarterly Jour- 
nal of Economics, 1891, under the caption of " Dis- 
tribution determined by a Law of Rent." In this 
Clark seeks to show that even the interest on capital 
and the wages of labor follow the law of rent. 
That both capital and labor may secure a differential 
return or a rent is, of course, admitted. Clark, 
however, seems to hold that the minimum rate of 
interest or the earnings of capital as an abstract 
fund — to use his own phrase — is a differential gain 
or a rent. As his completed work will shortly ap- 
pear, criticism at this time would hardly be in order. 
In the same volume of the Quarterly Journal of 



THE GENERAL DOCTRINE OF RENT. 107 

Economics there is an article by J. H. Hobson on 
" The Law of the Three Rents," which seems like- 
wise to give a very wide range to the doctrine of 
rent. This will be examined in a later chapter. 

II. THE DOCTRINE IN GERMAN ECONOMICS. 

55. Busch on the Rent of Labor. — This writer in- 
forms us that " not only special talent and ability 
have this distinction, but even the laborer who is 
presumed to have mere bodily strength attains to a 
skill which gives him a gain in the same way as 
talent. Nor can this be regarded as a return for the 
time during which he was acquiring this skill, be- 
cause during that time he received all his skill could 
command or was paid for his total effect. So the 
old experienced seaman does not work harder than 
the new beginner, and yet he gets higher wages, 
because he knows the parts of the ship better, and 
so can more quickly, surely, and j)roperly obey the 
commands of the officers. So in agriculture the ex- 
perienced ploughman is better paid than the inex- 
perienced. So, too, in stores the more skilful packer 
is paid better than the unskilled, though both use 
equal strength, and also in some positions greater 
honesty will command higher pay. If it was worth 
the trouble to be very exact in the matter, one could 
even contest whether wages-gain (Arbeiterslohn-Ge- 
winn) is rightly so characterized, for it can, at least 
in part, be regarded as a rent of the mere skill of 
labor, for though the rent is so insignificant, yet the 



108 VALUE AND DISTRIBUTION. 

incapable laborers cannot draw it." We here have 
a clear recognition of a rent of labor, and that as 
early as 1800.* 

56. Hufeland on the General Doctrine of Rent.f 
— Writing some seven years later, Hufeland quotes 
with approval Busch's remarks about the rent of 
labor. He, however, goes much farther than Busch, 
and attempts to show that the doctrine of rent is ap- 
plicable to all the factors of production. 

(a) Kent of Land. — In his discussion of this 
rent Hufeland clearly recognizes that it depends upon 
differences in fertility and distance from the mar- 
ket. He also sees that "the ground-rent depends, 
much more than hitherto considered gains, upon the 
market price of the product. It does not contain, 
like wages and capital, some principle for the deter- 
mination of the price, whereby these latter can be 
the cause of the price, for out of these, as is well 
known, the price of corn is formed, since they in their 
repair must receive a definite amount, and may even, 
upon this amount, obtain a proportional gain before 
the rent is paid. The ground-rent is entirely want- 
ing in this fundamental determining quantity ; it can 
only wait for what remains for it. The laborer and 
capitalist can first obtain not only their cost, but also 
their share of the gain, because when the gain is not 

* John George Busch, " Abhandlung von dem Geldumlauf," 
second edition, 1800. 

f " Neue Grundlegung der Staatswirthskunst," 1807. 



THE GENERAL DOCTRINE OF RENT. 109 

high enough they can go elsewhere to find employ- 
ment, but the landlord must wait for his rent, be- 
cause at best he can only allow his land to lie idle. 
Therefore, out of the market price comes first the 
wages and then the capital gain with some certainty, 
and the ground-rent is the least assured. If the 
market price sinks, the landlord must be the first to 
lose." 

(b) Rent of Capital. — In his discussion of this 
rent Hufeland is not very happy. He nowhere suc- 
ceeds in showing a gain due to a differential advan- 
tage in production. In other words, he only gives us 
a formal and not an actual recognition of this rent. 

(c) Rent of Labor. — Hufeland quotes the pre- 
ceding paragraph from Busch, but does not make any 
substantial addition to this part of the discussion. 

(d) Rent of Unternehmer. — In his treatment 
of this rent he writes (paragraph 72) : " He who ap- 
plies or employs capital may be the owner of the 
capital, or he may employ the capital of others. 

" He who employs the capital is the Unternehmer, 
the owner of the capital is the capitalist, and the re- 
turn which the Unternehmer receives is called the 
' Unternehmungsgewinn.' 

" The ' Unternehmungsgewinn' is the surplus after 
abstracting — 

"1. Wages with gain. 

" 2. Repair of capital. 

" 3. Repair for risk of capital. 

" 4. ' Capitalgewinn' or interest. 



HO YALUE AND DISTRIBUTION. 

"The balance comes to the Unternehmer, and is 
partly a gain which he draws because of the greater 
risk which he incurs, and partly a rent for Ms talent 
or other mental qualities. And so it is in the class of 
successful Unternehmers that the greatest wealth is 
gained. The rent for the talent and other qualities 
has no limit, because men of this sort are scarce." 

Again, paragraph 76, " There are certain natural 
conditions without which production is impossible. 
These are derived from nature alone, and are more or 
less rare. The possessor of them can deny their use 
to others unless they pay him for it. But what he 
receives is no repair or indemnification for any ser- 
vice he has rendered, because he has rendered none ; 
it is pure gain, pure rent. 

" To these natural sources of wealth belong two 
classes : 

" 1. Human talent, capability, qualities of mind, 
heart, and character. 

"2. The land or soil." 

He then goes on to remark " that hitherto only the 
last sort has been so regarded, and that now for the 
first time, through the addition of the first sort, the 
conception of the matter has been made more gen- 
eral." 

He then refers to Say as having some foreshadow- 
ing of this, and marvels that he did not recognize the 
general concept. 

It is true, Hufeland does not enter into that de- 
tailed discussion of the function and qualifications of 



THE GENERAL DOCTRINE OF RENT. HI 

the Unternehmer which we find in later writers, but 
that the Unternehmer receives a return because of 
his differential advantage, or that with equal pain, in 
the effort of production, there was an unequal re- 
turn, and so a rent, an unearned increment, he most 
clearly and explicitly recognized. 

It is also interesting to note that in his discus- 
sion of the subject he proceeds in the following 
order : 

1. Rent of Fixed Capital. 

2. Rent of Skill and Talent. 

3. Rent of Land. 

Or so clearly did he recognize the breadth and 
generality of the doctrine of rent that he discusses 
all other applications of the doctrine before proceed- 
ing to the consideration of land-rent. 

57. Mangoldt on the General Doctrine of Rent. — 
From 1807 to 1855 the general doctrine of rent had, 
in German economics, a somewhat varied career. 
Some writers, like Rau, who were strongly impressed 
by Ricardian economics, failed entirely to see any 
general doctrine of rent. Others, like Herman and 
Nebenius, had more or less of a grasp of the idea 
that rent is a general function common to all factors 
of production. It was not, however, until Mangoldt * 
published in 1855 that we find a full and complete 
exposition of the doctrine as applied to all factors of 
production. 

* " Die Lehre von Unternehmungsgewinn," 1855. 



112 YALUE AND DISTRIBUTION. 

(a) Rent of Land. — While Mangoldt recognizes 
the part played by difference in fertility and dis- 
tance from market, etc., he does not elaborate this 
part of the discussion or add anything to that which 
has already been well said by others. He seems to 
think that, so far as this rent is concerned, the evi- 
dence is all in and the case closed. 

(b) Rent of Capital. — In his discussion of the 
rent of capital we have a distinct advance upon all 
previous contributions. For while the formal recog- 
nition of this rent which we found in Hufeland re- 
curs again and again in German economics, it is 
always equated to some disadvantage in production, 
to risk, etc. Here for the first time it is equated to a 
differential advantage in production, or to the superi- 
ority of certain forms of capital in the production of 
a given commodity. In this connection Mangoldt 
writes : " This interest-rent is not drawn by all forms 
of capital equally, any more than wages-rent is 
drawn by all who are capable of working. It is 
only the surplus which a certain form of capital 
draws in excess of the general rate of interest. . . . 
The reason why a certain form of capital yields this 
extra return is either the scarcity of its kind or the 
scarcity of its extent or amount. 

"If capital of a certain kind is either uncondi- 
tionally necessary to the production of a commodity, 
or can only be replaced by a less satisfactory substi- 
tute, it begins to give an interest-rent as soon as the 
demand for the commodity for whose production it 



THE GrENEEAL DOCTRINE OF KENT. H3 

serves is so strong that the supply at existing prices 
is not sufficient to satisfy it." 

(e) Rent of Labor. — In his discussion of the 
rent of labor Mangoldt is not always clear that it is 
a differential gain. He does, however, clearly see 
that it is due to some advantage in production which 
certain laborers possess over others. He writes, 
" When we speak of a rent of personal ability, or of 
a wages-rent, we do not mean the surplus of the 
product of labor over the absolutely necessary meas- 
ure, nor a surplus over a pretended natural measure 
of wages. Wages-rent is to us an extra amount 
which certain performances obtain beyond the meas- 
ure belonging to them when their quantity and 
quality is compared with other performances. Hence 
it results that not labor in general, but only certain 
sorts of labor, draw a rent." 

He finds that this rent is due to two causes : First. 
Legal and other external restriction which prevent 
the free movement of laborers from one trade or 
occupation to another. Second. Differences in nat- 
ural or acquired ability. With regard to the latter 
he writes : " When we turn to the inner reasons 
of a wages-rent, that is, to the real actual want of 
persons possessed of the required ability, we find that 
the lower the order of the ability demanded in a 
certain performance, and so the more widely diffused 
this ability is, the less the wages-rent. Hence, as a 
rule, the mere physical labor can reckon less upon a 
rent than the more intellectual. Yet this may be 



114 VALUE AND DISTRIBUTION. 

otherwise when in any nation the intellectual de- 
velopment is at the expense of the physical, as 
usually happens in periods of decline. The greater 
the outlay in time, strength, or money in the acquisi- 
tion of skill or ability the easier and more certainly 
is a wage-rent obtained. This is the reason why 
pre-eminent gifts or education almost always receive 
very high pay. The rent in this case is due less 
to the scarcity of the improved natural talents than 
to the education. An extreme extension of the di- 
vision of labor results frequently, though only tem- 
porarily, in a wages-rent, because it develops one- 
sided skill, and so makes difficult the transition from 
one occupation to another. In industries that are 
subjected to great variations there occurs not infre- 
quently a wages-rent, because the sudden increase in 
demand compels the employment of those who are 
unskilled." 

(d) Rent of Unteenehmee. — In this connec- 
tion Mangoldt writes : " The Unternehmer's rent does 
not cause an increase in the price of products ; . . . 
it is true the Unternehmer's rent, like all other rents, 
can arise only when the price of the product is 
higher than the cost, but this is not the consequence 
of the Unternehmer's rent. It depends rather upon 
the scarcity of certain productive elements, and 
whereas in other rents the owners of the rare ele- 
ment, be they undertakers or not, draw the advan- 
tage, here it comes only to the Unternehmer. That 
it is the Unternehmer, in whose favor such a scarcity 



THE GENERAL DOCTRINE OF RENT. H5 

appears, does not in any way alter its importance or 
effect." 

From this lie is led to conclude that it would not 
only be unjust, but also impractical, useless, and un- 
wise to attempt to limit the Unternehmer's rent, 
arising from extraordinary personal ability, " because, 
in the first place, it would not decrease prices, and in 
the second, it would render the Unternehmer averse 
to making an increased effort. 

" There only remains, therefore, for such interfer- 
ence those cases where the natural relations grant to 
certain Unternehmers a lasting monopoly. Whether 
such cases really exist is to be considered with great 
carefulness. If the answer is in the affirmative, 
then of all measures in the public interest those are 
to be selected which interfere the least with the effi- 
ciency of the Unternehmer. For upon this the 
cheapening of production largely depends. Only in 
the most extreme cases can the abolishing of the 
Unternehmer's mode of conducting business be justi- 
fied." 

It is impossible to condense a volume such as this 
within the limits of two or three pages. It is, how- 
ever, clear that we here have an explicit recognition 
of rent as a general function, common to all the 
factors of production. So, too, the functions of the 
Unternehmer are recognized ; that he receives a re- 
turn which is essentially of the nature of a rent; 
which, to use the author's own words, should be 
called the rent of the Unternehmer. 



116 VALUE AND DISTRIBUTION. 

58. Schaffle on the General Doctrine of Rent. — 
Writing in 1869, this author refers to Mangoldt as 
agreeing with him in the contention that rent is a 
general function. 

Schaffle writes : " I have especially to thank Man- 
goldt, who in his ' Grundriss' in the most conscien- 
tious way cites my views and entirely agrees with me 
in his treatment of the doctrine of rent." Mangoldt 
in a later publication * resented the implied claim to 
priority which Schaffle here sets up. Mangoldt first 
refers to his own earlier publication (1855), which 
Schaffle had ignored. He then adds : " I repeat 
that I only call attention to this that I may not rest 
under any false suspicion. Not that I may obtain 
thereby any special merit or credit. I hold any con- 
tention about the priority of a thought which, so to 
speak, is in the air and which is simply the conse- 
quence of the already determined direction of scien- 
tific development, to be very idle. I am also not 
disposed to maintain that the thought, either in part 
or whole, was not promulgated by some one before 
me, for who can at this day have a complete knowl- 
edge of the literature of economics ?" The difference 
in the spirit of the two men is here sufficiently mani- 
fest. I think the judgment of any one who will 
compare their work will be that Mangoldt in 1855 
had as clear a concept of the general doctrine of 
rent as any to which Schaffle ever attained ; but the 

* " Volkswirthschaftslehre," p. 485. 



THE GENERAL DOCTRINE OF RENT. Xtf 

latter, being the first to treat the question in a text- 
book, may be said to have incorporated it a little 
more distinctly in the general body of economic 
theory. 

And yet, despite the fact that this general doctrine 
of rent was " so much in the air," there were un- 
doubtedly not a few German economists who failed 
to lay firm hold upon it. So strongly had the Eng- 
lish classical school impressed itself upon all subse- 
quent economic literature that German as well as 
English economists succumbed to its influence, not a 
few of the former failing to recognize the importance 
of the work done by such men as Hufeland and 
Mangoldt. Berens in his " Dogmen geschichte der 
Grundrente," published as late as 1868, devotes, with 
the exception of a rather full notice of Liebig, less 
than fifty pages of a four-hunclred-paged book to the 
German literature of his subject. Hufeland is dis- 
missed with a meagre page and a half, and this de- 
spite the fact that Berens takes cognizance of that 
extension (Erweitering) of the doctrine to the other 
factors of production in which Hufeland played so 
conspicious a part. 

59. The Austrians on the General Doctrine of 
Rent. — While this doctrine may yet lack something 
of complete acceptance among English and German 
economists, the Austrians regard it as so inherent 
a part of economic thought as to require no further 
discussion. 

Wieser writes : " His [Bicardo's] theory of land 



118 VALUE AND DISTRIBUTION. 

was amplified by pointing out that the rent of land is 
influenced by situation, — i.e., by its distance from the 
market for its produce. Finally, it has been shown 
that the ' rentability' of land in towns, and also that 
of capital and labor, is graduated in the same way as 
that of agricultural land, and that the opportunity 
of obtaining for the better quality a greater rent — a 
surplus return and a surplus value — occurs as often 
in the one case as in the other." (" Natural Value," 
p. 112.) 

In conclusion, it may be maintained that econo- 
mists are to-day fairly well agreed that rent is a gen- 
eral function, common to all the factors of produc- 
tion. In other words, that every surplus which does 
not enter into the determination of price is a rent, 
whether it is secured by landlord, capitalist, laborer, 
or entrepreneur. 



BOOK II.-PROFIT. 



CHAPTER I. 

PROFIT A PRICE-DETERMINING- SURPLUS. 

Ricardian economics divided the total social sur- 
plus into rent, wages, and interest. The first two 
being determined by definite laws, profit was made 
to include all that was left after rent and wages 
were paid. In other words, the term profit was ap- 
plied to an undefined complex return in the same 
loose way in which the pre-Smithian writers em- 
ployed the term rent. That profit, under this use of 
the term, included interest was generally recognized. 
Ricardo, indeed, frequently employs interest and 
profits as though they were interchangeable terms. 
That this resulted in more or less confusion of thought 
need hardly be urged.* The first to attempt an anal- 

* When Ricardo wrote of " the common rate of profit" * he 
doubtless had in mind that portion of the complex return 
which is usually designated as interest. So, too, when he 
wrote, " Let us suppose that all commodities are at their nat- 
ural price, and consequently that the profits of capital in all 
employments are exactly at the same rate." f 

Elsewhere he writes : " A fall in the general rate of profits 
is by no means incompatible with a partial rise of profits in 



* Bohn edition, p. 49. f Ibid., p. 68. 

119 



120 VALUE AND DISTRIBUTION. 

ysis of this complex return was the late Francis A. 
Walker, who insisted that the term profit should be 
restricted to that part of the entrepreneur's return 
which follows the law of rent. In the present chap- 
ter we will find occasion to take exception to this use 
of the term, and will suggest that it should be re- 
stricted to those monopoly surpluses that enter into 
the determination of price, while rent should include 
any and all surpluses that are determined by price. 
Later on we will endeavor to show that interest is 
distinguished from both rent and profit by the fact that 
it is a normal surplus. (See Sections 113 to 115.) 



particular employment. It is through the inequality of profits 
that capital is moved from one employment to another." * 
Here under the name of " general rate of profits" we have the 
phenomena of interest, while under profits in particular em- 
ployments we have a recognition of that "pure profit" which 
as Clark has declared, "exists under natural laws only while 
society is changing." Indeed, this very dynamic quality is 
clearly recognized in the last sentence of the paragraph just 
quoted. 

Ricardo was probably conscious of the complex character 
of the phenomena which he had included under the term 
profit. But as he held that scarcity values are the exception 
rather than the rule, profit, as we employ the term, would 
naturally play an unimportant part in his scheme of distribu- 
tion, hence any further analysis of this complex return seemed 
unnecessary. But this, as we have urged, is a method of pro- 
cedure that is not open to those who believe that scarcity 
goods are the rule rather than the exception. 



* Bohn edition, p. 97. 



PROFIT A PRICE-DETERMINING SURPLUS. 121 

So long as our reasoning rests upon the Ricardian 
assumption of free competition the necessity for this 
economy in the use of terms does not appear. But the 
moment we admit, with the Austrians, that scarcity 
goods are the rule rather than the exception we are 
compelled not only to construct a theory of value that 
will include such commodities, but are likewise con- 
strained to take some cognizance of such scarcity 
goods in our theory of distribution. It is no longer 
open to us to dismiss monopoly surpluses, or those 
surpluses which enter into the determination of price 
as something conceivable rather than actually exist- 
ing. On the contrary, they must be reckoned with 
and named from the very inception of any modern 
treatment of the problem of distribution. 

I. RENT AND PROFIT AND THEIR POINTS OF DIFFERENCE. 

Let us first take the case of a commodity that is 
freely reproducible or that does not have a scarcity 
value. In the production of this commodity a 
number of entrepreneurs are engaged. As men 
vary widely in business skill and ability, some of 
these entrepreneurs will doubtless succeed in pro- 
ducing the commodity at a lower cost than others. 
As it is a freely reproducible commodity, the least 
skilful entrepreneur engaged in its production will 
secure only his cost. That is, he will secure only 
wages and interest plus a normal wage for himself 
as an entrepreneur. Those, however, that are more 
skilful will secure in addition a surplus above their 



122 VALUE AND DISTRIBUTION. 

cost. The amount of this surplus will vary, of 
course, with their several degrees of skill and abil- 
ity. This is the differential surplus to which Walker 
has given the name profit, but as it admittedly follows 
the law of rent, it seems better to follow the German 
economists and call it the rent of the entrepreneur. 

Let us, again, take a case in which the commodity 
has a scarcity value. Assume that among the sev- 
eral entrepreneurs there is the same variation in skill 
or ability. Under this last assumption all save the 
marginal entrepreneurs will receive a differential sur- 
plus or rent, whose amount is determined by their 
several degrees of skill. Since, however, we are 
here dealing with a scarcity good, it follows that each 
and every entrepreneur engaged in the production 
of this commodity, the marginal man as well as the 
most skilful, will receive an additional surplus, to 
which I would restrict the term profit. 

60. Rent an Individual, Profit a Group Surplus. 
— In developing the points of difference between 
these two forms of surplus it should first be noted 
that rent varies with the individual skill or ability 
of the entrepreneur. On the other hand, profit is 
secured in equal amounts by each and every member 
of the group of entrepreneurs engaged in the pro- 
duction of the given commodity. Hence one might 
be characterized as the individual and the other as 
the group surplus. 

61. Rent a Differential, Profit a Marginal Sur- 
plus. — The several individual surpluses may be con- 



PROFIT A PRICE-DETERMINING SURPLUS. 123 

ceived as arranged in a series, and if this number 
is large enough, as in the case of wheat land, their 
variations might be by differential increments. From 
this stand-point, therefore, they might be regarded as 
differential surpluses. The second form of surplus, 
however, is secured by the marginal producer in 
common with all others engaged in the production 
of the given commodity, hence it might be called 
the marginal surplus. 

62. Rent a Limited Monopoly, Profit a Monopoly 
Surplus. — Then, too, this group or marginal surplus 
enters into the determination of price, and is clearly 
the result of a monopoly advantage in production, 
and so might fittingly be styled a Monopoly Surplus. 
The individual or differential surplus, on the con- 
trary, is not the result of any such monopoly advan- 
tage in production, or at least not to the same degree. 
In the case of wheat land, for instance, it is not a 
question between good land and no land at all, but 
between good land and poorer land. And so while 
there is undoubtedly a scarcity of the best land, 
yet the monopoly in such land is limited or re- 
stricted by the existence of other available though 
poorer land. Hence if the first is a monopoly sur- 
plus, the second is at most a limited monopoly surplus. 
This difference is clearly recognized by Malthus, who 
writes : " That there are some circumstances con- 
nected with rent which have an affinity to a natural 
monopoly will be readily allowed. The extent of the 
earth itself is limited and cannot be enlarged by 



124 VALUE AND DISTRIBUTION. 

human demand. And the inequality of soils occa- 
sions, even at an early period of society, a comparative 
scarcity of the best lands ; and so far is undoubtedly 
one of the causes of rent properly so called. On this 
account, perhaps, the term partial monopoly might 
be fairly applicable. But the scarcity of land thus 
implied is by no means alone sufficient to produce the 
effects observed. And a more accurate investigation 
of the subject will show us how essentially different 
the high price of raw produce is, both in its nature 
and origin and the laws by which it is governed, 
from the price of a common monopoly." (" An In- 
quiry into the Nature and Progress of Rent," p. 7.) 
63. Rent a Price-Determined, Profit a Price-De- 
termining Surplus. — There is, however, a still more 
important difference between these two forms of sur- 
plus, and one that will further justify the restricting 
of the term monopoly to the group or marginal sur- 
plus. The price of any commodity is the amount 
the consumers must pay under the existing condition 
of the supply of the given commodity. In other 
words, it is the amount that must be paid to the mar- 
ginal producer to induce him to continue his efforts 
to put this commodity on the market. In the case 
of freely reproducible goods this amount will equal 
the cost of this commodity to the marginal producer, 
but where the good has a scarcity price this amount 
will contain a surplus above the marginal producer's 
cost. It is nevertheless true that this surplus must 
be paid if the supply of the commodity is to be 



PROFIT A PRICE-DETEEMINING SURPLUS. 125 

maintained. It is, therefore, the essential and all- 
important characteristic of the group, marginal, or 
monopoly surplus, that it enters into the determination 
of price, while the individual, differential, or limited 
monopoly surplus does not enter into the determination 
of price. It is true that the latter is included in the 
price, but, as has long been maintained, the causal 
relation is from price to rent and not from rent to 
price. Now, one of the concepts that we have al- 
ways asssociated with monopoly influences is their 
power to fix the price which the consumer must pay. 
If we hold fast to this it follows that the term mo- 
nopoly surplus can only include that which we have 
severally designated as the group or marginal sur- 
plus. But far more important than this limitation 
of the term monopoly is the distinction lying back of 
it, — namely, that one form of surplus is price deter- 
mined and the other price determining. 

It seems, then, that our two forms of surplus may 
be variously characterized as follows : 

Rent might be called 

Individual, 

Differential, I Surplus. 

Limited Monopoly, or 

Price-determined 
Profit might be called ^ 

Group, 

Marginal, \ Surplus. 

Monopoly, or 

Price-determining 



126 VALUE AND DISTRIBUTION. 

64. Competing Differential Concepts. — It might 
be urged as against the above contention that since 
scarcity prices are of such frequent occurrence, the 
various industries could be arranged according to 
the amount of their marginal surplus, and that this 
would give us a series that might be even more truly 
differential than that to which we have applied this 
term. But, after all, what economists wish to know 
is, how the total surplus contained in the price of 
any given commodity is distributed among those 
who are parties to the production of that commodity. 
In other words, the ultimate objective phenomena 
with which we have to deal are the prices of com- 
modities. Hence we would insist that the differential 
surplus, which has primary importance for us as 
students of distribution, is that which arises in con- 
nection with the production of a given commodity. 
This is the differential surplus that is determined by 
price, and hence in all studies of distribution must 
be sharply distinguished from that marginal surplus 
which enters into the determination of price. 

II. INTEREST AND PROFIT AND THEIR POINTS OF DIFFERENCE. 

Having clearly distinguished profit from rent, it 
will now be necessary to distinguish profit from the 
other form of surplus (interest) so often confounded 
with it. In doiug so I shall be compelled to antici- 
pate a portion of the argument of a much later 
chapter. We have just seen that the differential 
series which is developed in the production of a 



PROFIT A PRICE-DETERMINING SURPLUS. 127 

given commodity is not the only series of this kind 
that might arise. In other words, we may conceive 
of the various industrial activities as arranged in 
a series according to their relative productivity or 
jjrofitableness. From this it follows that there are 
two conceivable margins of production, — the margin 
in the production of a given commodity and the 
margin of the entire field of industry. Since the 
supply of capital is limited while the opportunities 
for its profitable employment are practically un- 
limited, it follows that all capital which is free to 
move can find profitable employment ; but here as 
elsewhere the return secured by the capitalist as such 
is determined by the marginal utility of capital or 
by its productivity in the marginal or least produc- 
tive industry. 

65. Interest a Normal, Profit a Monopoly Sur- 
plus. — It is to this marginal surplus, or the earnings 
of capital in the marginal or least productive in- 
dustry, that the term interest must be restricted. 
Profit, on the other hand, is the marginal surplus 
that arises in connection with the production of a 
single commodity. Again, profit only arises where 
free competition fails, and so is a monopoly surplus. 
Interest, as we shall take occasion to show later on 
(Sections 113 to 115), only arises under conditions of 
free competition, and so, in contradistinction to the 
other two forms of surplus, may be called a normal sur- 
plus. This gives us the three forms of surplus, — Rent 
or limited monopoly surplus, Profit or the strictly mo- 



128 VALUE AND DISTRIBUTION. 

nopoly surplus, and Interest or the normal surplus. 
The first two are developed in connection with the 
production of any given commodity, the third is de- 
termined in the entire field of production. It should 
also be borne in mind that while rent is price deter- 
mined, both profit and interest enter into the deter- 
mination of the price of commodities. 



CHAPTER II. 

PROFITS AND THE CONCEPT OF A NO-RENT LAND. 

It has been shown that in the production of any- 
given commodity all payments at the margin enter 
into the determination of price. Again, it was main- 
tained that the original and fundamental contention 
of the doctrine of rent was • that rent is a surplus 
that does not enter into the determination of price. 
This compels the further conclusion that the marginal 
land does not pay a rent, or that there is a no-rent 
land. This corollary of the doctrine has been sub- 
jected to so much criticism as to compel its abandon- 
ment by some of the most strenuous advocates of the 
doctrine of rent. It is the purpose of the present 
chapter to show that this abandonment of the concept 
of a no-rent land is unnecessary, and that the argu- 
ments against, this corollary get their seeming force 
by confounding the differential surplus or rent with 
a marginal surplus or profit. 

66. Mill's Admissions and their Logical Result. — 
" Rent," writes Mill, " is not an element in the cost 
of production of the commodity that yields it, except 
in the case (rather conceivable than actually existing) 
in which it results from and represents a scarcity 
value. But when land capable of yielding rent in 

9 129 



130 VALUE AND DISTRIBUTION. 

agriculture is applied to some other purpose the rent 
which it would have yielded is an element in the cost 
of production of the commodity." 

Whether Mill so intended it or not, we here have 
a complete abandonment of the doctrine of rent, and 
this whether we confine ourselves to the first or sec- 
ond of his contentions. It has elsewhere been shown 
that Mill's contention in regard to scarcity goods 
being exceptional is without warrant in experience. 
As a matter of fact, such goods are the rule rather 
than the exception. What, then, becomes of the doc- 
trine of rent under Mill's first contention ? Nor is 
the outlook any more hopeful under his second con- 
tention. Let us assume that a rise in the price of 
wheat makes it profitable to extend wheat cultiva- 
tion to land that has heretofore been employed for 
grazing. Then, if I understand Mill's second con- 
tention, he holds that the amount paid for the use of 
this land for the growing of wheat must include the 
amount paid for grazing purposes, and will therefore 
enter into the determination of the price of wheat. 

That the farmer of the marginal wheat land (for- 
merly grazing land) must pay the owner of this land 
an amount that is equal to its rent as grazing land 
must be admitted. It must also be admitted that as 
this is a payment at the margin of wheat production 
it will enter into the determination of the price of 
wheat. From this Mill concludes that in all such 
instances rent enters into the determination of price. 
Now, when it is remembered that under this conten- 



PROFITS AND THE CONCEPT OF A NO-RENT LAND. 131 

tion rent enters into the determination of the price 
of all the products of land save those that are pro- 
duced in the least profitable branch of land employ- 
ments, it is clear that Mill's second contention is 
well-nigh as fatal as the first to the doctrine of rent. 
67. Mill inadvertently includes a Marginal Sur- 
plus or Profit under Rent. — Mill, of course, did not 
see that his contentions led to this result, and so con- 
tinued to hold the doctrine of rent as an essential 
part of the orthodox scheme of distribution. The 
reason for this failure to realize the serious nature of 
his admissions is to be found in the facts, first, that 
he believed scarcity goods to be " rather conceivable 
than actually existing," and, second, that he failed 
to recognize that under his second contention he 
was dealing with that very scarcity value which he 
believed might safely be ignored. As Clark has 
written, " For exact results each distinct kind of 
agriculture needs to be treated as a separate industry. 
The principle of non-competing groups has as clear 
an application here as in other departments of econ- 
omy. Wheat farming can scarcely be said to come 
into competition with sheep raising, nor can market 
gardening with dairy farming, wool growing, or cat- 
tle raising. . . . Each of these industries has its own 
margin of cultivation." In other words, when Mill 
included the rent paid for one use of land as part 
of its rent in another employment he included a 
scarcity, marginal, or monopoly surplus under the 
caption of rent. This may be shown a priori and 



132 VALUE AND DISTRIBUTION. 

in a brief way. In the preceding chapter we saw 
that the monopoly surplus contained in the price of 
scarcity goods was secured by the marginal man in 
common with all those that produce under more fa- 
vorable circumstances. In other words, the scarcity 
of any good is reflected in the fact that it yields a 
monopoly, or marginal surplus, or a surplus that 
enters into the determination of price. A moment's 
consideration will show that the amount which would 
have been paid for the land for grazing purposes is a 
surplus of this kind. For it is secured by the owners 
of the marginal land in wheat production in com- 
mon with the owners of the better land employed in 
the producing of wheat, and thus as a group, mo- 
nopoly, or marginal surplus it certainly enters into 
the determination of the price of wheat. In other 
words, we here have that marginal surplus to which 
the name profit has been applied. I would urge, 
therefore, that the including of this form of surplus 
under the term rent can only result in confusion. 

68. Rent the Differential Surplus in a Single In- 
dustry. — The question now arises, Is there any part 
of the total payment made to the owners of wheat 
land that is a differential surplus, or that does not 
enter into the determination of price, and so satisfies 
the fundamental condition of the doctrine of rent? 
The answer is yes. If we confine ourselves to the 
variations in the productivity of land employed for 
the growing of some one commodity, say wheat, we 
find a surplus that is a true differential and which 



PROFITS AND THE CONCEPT OF A NO-RENT LAND. 133 

enters into the determination of the price of the 
given commodity. Any payments beyond this are 
included either under interest or profit, and though 
these latter surpluses are both included in the gross 
amount paid to the landlord, there is no more reason 
for including one than for including the other under 
the term rent. In either case you invalidate the 
whole doctrine of rent. In brief, then, the reut of 
wheat land is not the difference in productivity be- 
tween the best wheat land and the poorest land in 
any employment, but the difference between the best 
and poorest wheat land. 

69. Hobson's Objections to this Use of the Term 
Rent. — The earlier discussion of this question was 
largely confined to the problem of land rents. But 
with the recognition of the fact that rent is a gen- 
eral function common to all factors of production, a 
more extended use of the term rent has been made 
to include not only the earnings of land but as well 
the whole range of industry. A recent writer * has 
declared, " It will be open to us if we prefer it, for it 
is entirely a question of convenience in the use of 
the terms, to say that land ... at the margin of 
employment pays no rent ; that is, we may take the 
lowest return for the use of land and call it by some 
other name than rent. We would thus be able to 
maintain, as a general proposition, that rent forms 
no element of price. But to do this we would be 

* J. H. Hobson, Quarterly Journal of Economics, 1891. 



134 VALUE AND DISTRIBUTION. 

compelled to an elaborate grading of industries, ac- 
cording to the prices paid for land, labor, and capi- 
tal, at the margin of employment in each respective 
industry. 

" If, on the other hand, as seems more reasonable, 
we should prefer to measure by a single line of fixed 
money value applied through the whole of industry, 
we must call by the name rent all payments for the 
use of land, and all payments beyond three per cent., 
and five shillings for the use of capital and labor. 
But whichever mode of reckoning we prefer, it will 
be equally applicable to all three requisites of pro- 
duction." 

Now, it may be true that "it is entirely a question 
of convenience in the use of terms" whether we em- 
ploy separate and distinct terms for these two forms 
of surplus or take rent as a generic term applicable 
to both, and then distinguish between them by em- 
ploying additional qualifying terms, as price-deter- 
mining or price-determined rent. But it is hardly a 
question of mere convenience whether or not one of 
the fundamental cleavage planes in all questions of 
distribution shall be recognized in our terminology. 
In other words, we can only confound confusion by 
including both these forms of surplus without any 
discrimination under a common name. It is true 
that both forms enter into the amount paid to the 
landlord, yet by what compulsion must both of them 
be included under the term rent? This term has 
already been appropriated and long defined as a sur- 



PROFITS AND THE CONCEPT OF A NO-RENT LAND. 135 

plus that is determined by price. Why, then, so long 
as we have a share in distribution of which this is 
true, should we surrender this use of the term that it 
may be reappropriated and redefined ? It is true that 
Kicardo, having in mind an ideal condition of free 
competition, held that price was made up of rent and 
costs. At present, however, we recognize the general 
prevalence of scarcity goods, and have reconstructed 
our theories of value and price to the end that they 
shall include such goods. Why, then, should we con- 
found the discussion of distribution by including the 
special and peculiar surplus that results from scarcity 
values, and so enters into the determination of price 
under the term rent ? 

We have already maintained that there are three 
essentially different forms of surplus, — the differen- 
tial, the marginal, and the normal ; the last typified 
in interest. Our objection to Hobson's contention is, 
in brief, that in his anxiety clearly to distinguish 
this third form from the other two he is led to ignore 
the difference between the differential and marginal 
surpluses, a difference which I believe to be of fun- 
damental importance in any discussion of the prob- 
lem of distribution. 

70. Objections to Walker's Use of the Term Profit. 
— We have seen that Walker applied the term profit 
to that portion of the entrepreneur's return which fol- 
lows the law of rent. Not the least of the objections 
to this use of the term profit is the fact that it breaks 
in the most violent way with all the traditions of the 



136 VALUE AND DISTRIBUTION. 

science. For no matter how confused economists 
may have been in their use of the term profit, no 
matter how they may have confounded it with inter- 
est, they seldom failed to maintain that it enters into 
the determination of price, and hence that it is in 
direct antithesis to rent or to that which is deter- 
mined by price. 

Adam Smith writes : " Rent, it is to be observed, 
therefore, enters into the composition of the price of 
commodities in a different way from wages and profit. 
High or low wages and profit are the causes of high 
or low price ; high or low rent is the effect of it." 

Malthus writes : " Profits are in reality a surplus, as 
they are in no respect proportioned (as intimated by 
the economists) to the wants and necessities of the 
owners of capital, but they take a different course in 
the progress of society from rents, and it is necessary, 
in general, to keep them quite separate." * 

Ricardo writes : " Mr. Malthus appears to think 
that it is a part of my doctrine that the cost and the 
value of a thing should be the same ; it is, if he means 
by cost, ' cost of production' including profits." f 
Again, on page 345, he writes : " The laws which 
regulate the progress of rent are widely different from 
those which regulate the progress of profits, and sel- 
dom operate in the same direction." 

J. S. Mill writes : " Profits, therefore, as well as 

* Inquiry into the Nature and Progress of Kent, p. 16. 
f Bohn edition, p. 39. 



PROFITS AND THE CONCEPT OF A NO-PENT LAND. 137 

wages, enter into the cost of production, which de- 
termines the value of produce." While Walker him- 
self never fails to insist that the essential fact in 
regard to rent is, that it does not enter into the cost 
of production. 

This being the final test in regard to " rent," why 
should we not call that part of the entrepreneur's re- 
turn that satisfies this condition the rent of the entre- 
preneur, so allowing us to employ the term " profit" 
to designate that form of surplus which enters into 
the determination of price ? This, as I have en- 
deavored to show, would agree better with the tra- 
ditional use of the term profit. 

71. The Suggested Use of the Terms Rent and. 
Profit. — It is not given to any one person to say what 
terms shall be adopted ; this can only result from the 
establishing of some consensus in the matter among 
economists generally ; a single writer may show, as 
I have endeavored to do, that a new concept has 
arisen, and that a failure to reach any agreement as 
to the terms employed has resulted in increasing con- 
fusion ; he may then suggest such terms or use of 
terms as seems to him to eliminate this source of con- 
fusion. To that end I would suggest that the term 
rent be strictly confined to the price-determined sur- 
plus that arises in connection with the production of 
a given commodity, and that the term profit be con- 
fined to the monopoly or price-determining surplus 
that arises in connection with the production of a 
given commodity. 



138 VALUE AND DISTRIBUTION. 

But too much must not be expected from these or 
any other equally short terms. If, consciously or 
unconsciously, we think of these as meaning indi- 
vidual and group, differential and marginal, or any- 
thing but price- determined and price-determining 
surpluses, we are likely sooner or later to end in con- 
fusion. When we write rent, we should think price- 
determined surplus. When, on the other hand, we 
write profit, it is price-determining surplus that should 
be called up in our mind. It is far less important 
what terms are employed than that we should not 
lose sight of this fundamental distinction. 



BOOK III.-INTEREST. 



CHAPTER I. 

EARLIER IDEAS IN REGARD TO INTEREST. 

I. USURY IN LESS DEVELOPED SOCIETIES; INTEREST IN 
HIGHLY DEVELOPED SOCIETIES. 

In earlier times a large portion of all loans was 
made for purposes of consumption, and frequently to 
people in great need of money. Such loans, indeed, 
still predominate in communities where capitalistic 
methods of production have not attained any great 
development. Under such circumstances the in- 
terest* paid is usually quite high; the capitalist (or 
seller) has the monopoly advantage, and is disposed 
to force the price of his commodity to the extreme 
limit set by its marginal utility to the borrower (or 
buyer) . 

72. Aristotle. — It is not at all surprising, there- 
fore, that under these circumstances the taking of in- 
terest has been vehemently denounced by both philos- 

* The term interest is here employed as in common usage, 
and so includes a monopoly surplus. Later on it will be 
limited to the rate fixed by the marginal productivity of 
capital or to the normal return for the use of capital. 

139 



140 VALUE AND DISTRIBUTION. 

opher and priest. Aristotle writes : " The most hated 
sort [of money-making], and with the greatest rea- 
son, is usury, which makes a gain of money itself, 
and not from the natural use of it. For money was 
intended to be used in exchange, but not to increase 
at interest. And this term usury, which means the 
birth of money from money, is applied to the breed- 
ing of money because the offspring resembles the 
parent. Wherefore of all modes of making money 
this is the most unnatural."* 

In ancient times this attitude towards the problem 
of interest found repeated expression in the civil law. 
This was especially true wherever the agrarian ele- 
ment exercised the legislative function, but as com- 
merce expanded, such laws, though still retained on 
the statute books, became, to a large extent, dead 
letters. After the collapse of the Roman Empire 
and the return of society to more primitive con- 
ditions the opposition to interest was again renewed. 
But with the rise of modern trade and industry, 
which preceded the Reformation, the attitude towards 
this question again suffered a change, the canon 
laws and the denunciations of the Church being 
alike ignored in more progressive countries like the 
Netherlands. 

73. Calvin. — In keeping with this tendency we find 
that the champion of Protestantism not only repudi- 
ates the canon laws, but actually defends the taking 

* Jowett's translation, p. 19. 



EARLIER IDEAS IN REGARD TO INTEREST. 141 

of interest where it is " equitable and fair." It is 
interesting to notice that his defence rests entirely 
upon the change that had taken place in industrial 
conditions, a change that resulted in a condition of 
affairs in which most loans were made for purposes 
of production. And so we find that Calvin recog- 
nizes that the rate of interest may be fair and equita- 
ble when the borrower can so employ the sum bor- 
rowed as to secure a return for himself in excess of 
the interest paid to the lender. 

74. Locke. — This phase of the question is still 
further accented by Locke ; * he, however, like Cal- 
vin, still has in mind only that interest which is a 
return for the use of money. 

II. INTEREST A RETURN FOR THE USE OF WEALTH AND 
NOT FOR THE USE OF MONEY. 

75. Hume, however, saw quite clearly that interest 
is a return for the use of wealth in general and 
not for the use of a particular form of wealth, — 
money. This comes out in his demonstration of the 
fact that the rate of interest in a country does not 
depend on the amount of gold and silver that the 
country possesses, " but on the amount of its riches 
or stock." f 

The importance of this proposition in its bearing 
upon the theory of interest is even yet not fully 

* Some Considerations of the Consequences of Lowering 
the Bate of Interest and Eaising the Yalue of Money, 1691. 
f Of Interest, Essay XXVI. 



142 VALUE AND DISTRIBUTION. 

realized, many well-meaning though not well-in- 
formed advocates of reform still contending that the 
rate of interest may be decreased by increasing the 
supply of money. Anything like a complete solu- 
tion of this problem must be deferred to a later chap- 
ter, but it may be well to note that while the total 
payment to a landlord includes several elements, yet 
economists have restricted the term rent to a par- 
ticular portion of this total payment; so, too, the 
total payment for the use of capital may include 
several elements, but for the sake of clear thinking 
economists must restrict the term interest to a par- 
ticular portion of this total payment. The owner of 
a scarce machine or plant secures a certain net re- 
turn. Out of this he pays a certain minimum rate 
to the capitalist for the sums borrowed. It is to 
this minimum rate that economists would restrict 
the term interest. Any surplus above this is clearly 
due to the scarcity of the particular machine or 
plant ; for as these are multiplied such extra gain 
tends to disappear. The application of this to the 
case of money is obvious. An increase in the supply 
of the money commodities would unquestionably 
tend to decrease the extra gain that arises from the 
scarcity of these particular forms of wealth, but it 
would not seriously or directly affect the normal 
surplus or interest per se* 

* Prior to Hume's time it was held that a nation should so 
regulate its commerce as to attract to itself large supplies of 



EARLIER IDEAS IN REGARD TO INTEREST. 143 

76. Adam Smith. — While this writer did not suc- 
ceed in working out any coherent theory of interest, 
yet his "Wealth of Nations" * contains the suggestion 
of at least four theories that have found favor in 
more recent literature. These are known as The 
Exploitation Theory, The Use Theory, The Produc- 
tivity Theory, and the Abstinence Theory. In the 
chapters immediately following we will review these 
theories in the above-mentioned order. 



the money commodities, — gold and silver. In other words, it 
was held that a country was wealthy if it held large stocks of 
these commodities. Hume protested against this, declaring 
that the wealth of a community did not lie in its supply of the 
money commodities, but in its supply of general commodities, 
the things that men eat, wear, etc. The reaction of thought 
that set in with Hume's statement of the case has possibly 
gone too far. It is true that the normal surplus or interest 
per se depends in last resort upon the marginal productivity 
of general capital, and so is largely independent of the sup- 
ply of money or money commodities. It is, however, also 
true that a limited supply of money may give to the owner 
of these money commodities a monopoly advantage; hence 
variations in the supply of money may seriously affect the 
distribution and so the production of general wealth. It re- 
mains true, however, and this is the fact that interests us 
most at this point, that interest per se is a normal surplus, and 
depends not upon the amount of the money commodities in a 
country, but upon the supply of general capital or productive 
goods. 

* Book I. Chap. YI., and Book II. Chap. I. 



CHAPTER II. 

THE EXPLOITATION THEORY OP INTEREST. 

This theory may be fairly stated in the following 
propositions : 

1. The value of any good is measured by the 
quantity of labor required to produce it. 

2. Capital is not an original and independent fac- 
tor of production, but may be resolved into the labor 
that produced it. 

3. The whole product belongs in equity to the 
laborer. The capitalist, however, takes advantage of 
the laborer's necessities and compels him to make 
a wages contract that despoils the wage-earner of a 
large part of the product of his labor ; this is done, 
of course, under the sanction of law and custom.* 

* These propositions will all be found in the following pas- 
sages from Eodbertus. He writes: "As there can be no in- 
come unless it is produced by labor, rent rests on two indis- 
pensable conditions. First, there can be no rent if labor does 
not produce more than the amount which is just necessary 
to the laborers to secure the continuance of their labor, for it 
is impossible that without such a surplus any one, without 
himself laboring, can regularly receive an income. Secondly, 
there coiild be no rent if arrangements did not exist which 
depi'ive the laborers of this surplus, either wholly or in part, 
and give it to others who do not themselves labor, for in the 
nature of things the laborers themselves are always the first 
to come into possession of their product. That labor yields 
144 



THE EXPLOITATION THEORY OF INTEREST. 145 

77. The Contention that the Value of all Goods 
is measured by Quantity of Labor. — It should be 
noted that the socialist writers believed that in this 
contention they simply followed the teachings of the 

such a surplus rests on the economic grounds that increases 
the productivity of labor. That this surplus is entirely, or in 
part, withdrawn from the laborers and given to others rests 
on grounds of positive law ; and as law has always united 
itself with force, it only effects this withdrawal by continual 
compulsion." Bodbertus defines rent as " all income secured 
without personal exertion solely in virtue of possession." The 
term rent, as here employed, evidently includes any and all 
parts of the social product that are not secured by the laborer, 
whether they take the form of rent, profit, or interest. 

" The form which this compulsion originally took was slavery, 
the origin of which is contemporaneous with that of agricul- 
ture and landed property. The laborers who pi'oduced such a 
surplus in their labor-product were slaves, and the master to 
whom the laborers belonged, and to whom consequently the 
product itself also belonged, gave the slaves only so much as 
was necessary for the continuance of their labor, and kept 
the remainder or surplus to himself. If all the land, and at 
the same time all the capital of a country, has passed into 
private property, then landed property and property in capi- 
tal exert a similar compulsion even over freed or free laborers. 
For, first, the result will be the same as in slavery, that the 
product will not belong to the laborers, but to the masters of 
land and capital; and, secondly, the laborers who possess 
nothing, in the face of the masters possessing land and capi- 
tal, will be glad to receive a part only of the product of their 
own labor with which to support themselves in life ; that is to 
say, again, to enable them to continue their labor. Thus, al- 
though the contract of laborer and employer has taken the 
place of slavery, the contract is only formally and not actu- 

10 



146 VALUE AND DISTRIBUTION. 

orthodox economists to their legitimate conclusions, 
— a belief for which they certainly found consider- 
able warrant in the writings of the earlier English 
economists. 

(a) ElCARDO AND THE CASE OF SCAKCTTY GoODS. 

— Ricardo writes : " There are some commodities the 
value of which is determined by their scarcity alone. 
No labor can increase the quantity of such goods, 
and therefore their value cannot be lowered by an 
increased supply. Some rare statues and pictures, 
scarce books and coins, wines of a peculiar quality, 
which can be made only from grapes grown on a 
particular soil of which there is a very limited quan- 
tity, are all of this description. Their value is wholly 
independent of the quantity of labor originally neces- 
sary to produce them, and varies with the varying 
wealth and inclinations of those who are desirous 
to possess them." He, however, adds, " These com- 
modities, however, form a very small part of the 
mass of commodities daily exchanged in the market. 
By far the greatest part of those goods, which are 
the object of desire, are procured by labor ; and they 
may be multiplied, not in one country alone, but in 
many, almost without an assignable limit, if we are 
disposed to bestow the labor necessary to obtain 
them." (" Principles of Economics," Chap. I. Sect. I.) 

ally free, and hunger makes a good substitute for the whip. 
What was formally called food is now called wage." (" Soziale 
Frage," p. 33.) We have here availed ourselves of the transla- 
tion in Bohm-Bawerk's " Capital and Interest." 



THE EXPLOITATION THEORY OF INTEREST. 147 

While we have here a clear recognition of the fact 
that value may be determined either by labor or by 
scarcity, yet the cases in which scarcity is the deter- 
mining factor are dismissed from further considera- 
tion as being of exceptional occurrence in the world's 
exchanges. Clearly, then, the argument by which 
the orthodox economists would demonstrate that value 
depends entirely upon labor stands or falls with the 
truth of this last assumption, — that scarcity goods 
are exceptional. It is in this connection that Bohm- 
Bawerk introduces his formidable list of exceptions 
to this assumption of the orthodox economists. 

Biihm-Bawerk first shows by Bicardo's own admis- 
sions that rare statues and pictures, scarce books and 
coins, wines of a peculiar flavor, and the products of 
the better lands are exceptions to this assumed prev- 
alence of freedom in production. To these Bohm- 
Bawerk adds the products of more skilful laborers, as 
well as all goods in whose production some patent, 
copyright, or trade secret plays a part. Bohm- 
Bawerk also calls attention to the fact that even so- 
called freely reproducible goods are only such during 
the brief interval that their price is actually at the 
normal point, or that during their fluctuations on 
either side of the normal they cease to be freely 
reproducible goods. 

Finally, we come to an exception that bears di- 
rectly upon the interest problem, for Bicardo him- 
self declares that " the principle that the quantity of 
labor employed on the production of goods regulates 



148' VALUE AND DISTRIBUTION. 

their relative value suffers considerable modification 
by the employment of machinery and other fixed and 
durable capital." (" Principles of Political Econ- 
omy," Bohn edition, p. 23. Heading of section.) 
As in this last exception we have the crux of the 
whole discussion, we would not seem to beg the ques- 
tion by too strong an insistence upon it at this stage 
of the argument. Its introduction at this point will, 
however, serve to show that the contentions of the 
socialist writers have not that unqualified support of 
the orthodox economists which the former would fain 
believe. 

On the other hand, it should be noted that a very 
important group of the admitted exceptions is elimi- 
nated if we have in mind a marginal cost theory. In 
that case the products of the better land, more ef- 
ficient machines, and more skilful labor cease to be 
exceptions to our theory of price. But even with 
these eliminated we still have a formidable list of ex- 
ceptions. When to all goods in whose production a 
patent right, trade secret, import duty, pool, or trust 
plays a part, we add all so-called freely reprodu- 
cible goods, except for the brief interval that their 
j>rice is actually at the normal point, we have a very 
serious list of exceptions to the contention that the 
value of goods is determined by the labor expended 
in their production. 

This argument, based upon the general prevalence 
of scarcity goods, occupies considerable space inBohm- 
Bawerk's criticism of the Exploitation Theory, and 



THE EXPLOITATION THEORY OF INTEREST. 149 

yet it must be admitted that it does not seriously 
affect the ultimate contention of the socialist writers. 
It is clearly open to them to reply, Your whole 
argument is a manifest admission of our claim. We 
do not deny the existence of scarcity values as so- 
ciety is now constituted. On the contrary, we hold 
that the present inequitable distribution of the social 
product is clue to the existence of these monopoly 
goods. Under a socialistic regime, however, all such 
scarcity or monopoly prices would disappear, and the 
value of all goods would be measured by the quan- 
tity of labor required to produce them. 

(b) What Labor is the Standard of Value ? — 
But even though we accept the teaching of the so- 
cialists, that value is measured by quantity of labor, 
we have in this a proposition that is confronted by 
serious practical difficulties. If labor is the source 
of all value, the question naturally arises, By what 
labor shall this value be measured ? The man that 
produced the commodity may have been lazy and in- 
different ; must we pay him for his time, no matter 
how long he takes to complete the work, or shall we 
pay him according to the time of the most expert 
man we can find? Marx answers that we must pay 
for any commodity "the socially necessary labor 
time," and this he defines as the " labor time re- 
quired to produce a use value under the conditions 
of production that are socially normal at the time, 
and with the socially necessary degree of skill and 
intensity of labor." 



150 VALUE AND DISTRIBUTION. 

" The single commodity here is to be counted as 
the average sample of its class. Commodities, there- 
fore, in which equally great amounts of labor are 
contained, or which could be made in the same labor 
time, have the same amount of value. The value of 
one commodity is to the value of every other com- 
modity as the labor time necessary to the production 
of the one is to the labor time necessary to the 
production of the other. . . . As values all com- 
modities are only definite amounts of congealed labor 
time." * 

Now, no matter how we may attempt to disguise 
the facts by the use of such phrases as " the socially 
necessary degree of skill and labor," it still remains 
true that the more capable man will not exert his 
full power if his reward is no greater than that of a 
less capable and possibly lazy companion. This is 
something that is so inherent in the nature of man- 
kind that its elimination can only be effected by sub- 
jective changes in man himself. Structural changes 
in society, the introduction, for instance, of a social- 
istic regime, can only remotely affect the problem. 
For, despite all our assumptions to the contrary, men 
as actually constituted are individuals ; they differ in 
skill and ability, and they demand that they shall be 
specially rewarded for the exertion of any superior 
power which they possess. And yet if the socialist 
theories mean anything, they mean that labor, like 

* Das Capital, second edition, p. 10. 



THE EXPLOITATION THEORY OF ESTEREST. 151 

all other goods, must be rated according to the pain 
or disutility endured. 

Marx has attempted to meet this difficulty as fol- 
lows : " Complicated labor counts only as strength- 
ened or rather multiplied simple labor, so that a 
smaller quantity of complicated labor is equal to a 
greater quantity of simple labor. Experience shows 
that this reduction is constantly made. A com- 
modity may be the product of the most complicated 
labor ; its value makes it equal to the product of sim- 
ple labor, and represents, therefore, only a definite 
quantity of simple labor." * 

Does this, however, solve our difficulty? It is 
undoubtedly true that if a day's labor of a skilled 
physician or artist is worth fifty dollars, and a day's 
labor of a porter or navvy is worth only one dollar, 
then the pay of the former may be expressed as fifty 
times the pay of the latter. But does this help us in 
any way ? According to the contention of the social- 
ists, the pay of labor should be equated to the pain 
or disutility endured. How, then, are we to recon- 
cile this with the fact that while one man receives 
one dollar another man receives, and must receive as 
men are constituted, fifty dollars for a day's labor in- 
volving even less fatigue ? Nor is it a good and suf- 
ficient answer to this question to say that the physi- 
cian or artist has expended much time, money, and 

* Das Capital, p. 19. See also Ricardo's Principles, Chap. 
I. Sect. II. p. 13. 



152 VALUE AND DISTRIBUTION". 

labor in acquiring his skill, for it may be retorted 
that much of their ability is natural and not acquired. 
In other words, the value of labor, as of all commodi- 
ties, depends fundamentally upon its utility and sup- 
ply ; pain or disutility only entering into the problem 
when it is the cause of the limitation of the supply. 

78. Contention that Capital is not an Original 
and Independent Source of Value. — Rodbertus 
writes : " Every product that comes to us through 
labor in the shape of a good is, economically speak- 
ing, to be placed to the credit of human labor alone, 
because labor is the only original power, and also 
the only original cost with which human economy is 
concerned." * This, of course, excludes both nature 
and capital as original and independent factors of 
production. 

(a) Natural Goods are Sometimes Original 
Powers. — With regard to natural goods, Rodbertus 
writes : " All other goods except those that cost labor, 
however useful or necessary they may be to mankind, 
are natural goods, and have no place in economic 
consideration. . . . Man may be thankful for what 
nature has done beforehand in the case of economic 
goods, as it has spared him so much extra labor, but 
economy takes no notice of them only in so far as 
labor has completed the work of nature." j" 

* Erklarung und Abhilfe, p. 160. Similarly, Sociale Frage, 
p. 69. 

f Sociale Frage, p. 69. 



THE EXPLOITATION THEORY OP INTEREST. 153 

That this is true of those natural goods, like air 
and water, whose supply is practically unlimited no 
one will question. But what shall we say about 
those natural goods whose supply suffers serious limi- 
tations ? We can hardly say that " economy takes 
no notice of them" when we are constrained to econo- 
mize in our employment of them. By socializing 
these goods we would prevent particular individuals 
from monopolizing them to their own peculiar ad- 
vantage. But we would not thereby remove them 
from the category of economic goods. 

(b) Capital an Independent Power. — That cap- 
ital is not an original power will be generally ad- 
mitted, but when it is further urged that it is not 
an independent power or factor in production, the 
conclusion does not seem to be so well founded. 

First. As we have just seen, labor is not the only 
original power deserving economic consideration. 
Natural forces if limited in supply share with labor 
this unique distinction. Hence, in labor and the 
other natural forces which we are compelled to econ- 
omize, we have the two factors that join in the crea- 
tion of the secondary power — capital. It is, there- 
fore, impossible to resolve all capital into labor alone. 

Secondly. Though it were true that all capital could 
be resolved into labor, as the original source from 
which it sprung, that does not justify the claim that 
capital is not now an independent factor. When we 
show that a particular organic form has been evolved 
from some protoplasm of the past, we do not hold 



154 VALUE AND DISTRIBUTION. 

that it is not now an independent species far removed 
from that from which it was evolved. 

Thirdly. Though mankind labored never so assid- 
uously, the increase of the supply of capital neces- 
sarily involves the postponement of some enjoyment, 
some abstinence or disutility endured by the marginal 
saver or capitalist. Hence while it is largely true 
that without labor there would be no capital, yet it is 
equally true that without the abstinence of the mar- 
ginal saver there would likewise be no capital. 

79. The Contention that the Whole Product be- 
longs in Equity to the Laborer. — This brings us to 
the third and last proposition, that "according to 
nature and the ' pure idea of justice' the whole value 
of the product ought to belong without deduction to 
the laborer who produced it." That this contention 
has been successfully attacked by Bohm-Bawerk can- 
not, I think, be denied. His argument is, in brief, as 
follows : 

That the laborer should at the present time re- 
ceive the present value of his product, or that at 
some future time he should receive the now future 
value of the product, may be consonant with the 
strictest equity, but that he should at the present 
time receive the future value of his product is 
neither just or equitable, so long as men generally 
prefer a hundred dollars in hand to-day rather than 
the most positive assurance of receiving a like amount 
at some future date. 

Let us take the case of wine. As is well known, 



THE EXPLOITATION THEORY OF INTEREST. 155 

wine improves with time, and with this improvement 
there is a corresponding advance in price. A cask 
of wine which was worth ten dollars when new may 
at the end of ten years be worth twenty dollars. To 
whom shall this increase be credited ? If we say that 
it belongs to the laborers, we must show in what way 
they have a claim upon an increase in value that 
takes jDlace long after they have ceased to expend 
any effort in the production of the wine. If we 
answer that labor is the only source of value, hence 
this increase in value should be distributed among; 
the laborers who were originally employed in its pro- 
duction, we, of course, beg the whole question, since 
we are here trying to determine whether or not the 
laborer is entitled to the entire value of the product. 
Suppose, however, we admit that the laborer's 
claim to this increase in value is well founded, how, 
then, are we to determine the amount to be paid to 
the laborers ? If Ave give them the entire value of 
the wine at the time of the vintage (ten dollars), we 
leave in the hands of the employer a surplus of 
which, according to Rodbertus and Marx, the laborer 
is robbed. Shall we, then, pay to the laborer the 
value of the wine at the end of the ten years, or 
twenty dollars ? If we decide this in the affirmative 
we are confronted with the question, How do we 
know how long it will be before the wine is sold ? 
It might be that in the second year after the vintage 
the employer, from stress of circumstances, would be 
compelled to sell. He would then have paid twenty 



156 VALUE AND DISTRIBUTION. 

dollars for wine that only brought, say, twelve dollars. 
Again, if he only paid twelve dollars, then what must 
he pay the laborers who are now producing new wine, 
which he is compelled to sell for ten dollars ? Will 
the latter grant that ten dollars is a just wage of labor 
when others receive twelve dollars for exactly the 
same labor ? 

Again, we will take a case in which all possible 
exploitation by a capitalist employer is eliminated. 
Five laborers enter into a co-operative agreement to 
construct a machine. We will assume that it takes 
five years to complete the machine, and that at the 
end of that time it is sold for five hundred and fifty 
dollars. As they conduct the enterprise without 
help from any one else, they will at the end of five 
years be able to divide among themselves the en- 
tire value of the product, or five hundred and fifty 
dollars. Let us bring this into a little closer corre- 
spondence with actual life by saying that one man 
mines the ore, coal, limestone, etc. ; another smelts 
these and runs the iron into pigs ; another makes 
the necessary patterns ; another the castings ; while 
the last does the work in the machine-shop in the 
completion of the machine. As these processes are 
necessarily consecutive, we can assume that each 
takes one of the five years necessary for the com- 
pletion of the machine. Now, under these circum- 
stances, how are we to determine how much of the 
five hundred and fifty dollars each man should re- 
ceive when the machine is completed and sold ? If 



THE EXPLOITATION THEORY OF INTEREST. 157 

we say they should receive one-fifth each, or one 
hundred and ten dollars, and attempt so to divide 
the total value, we at once find ourselves in serious 
trouble, for while the machinist would be satisfied, 
the miner is likely to make vigorous protest against 
the gross injustice of any such division, for he re- 
ceives one hundred and ten dollars four years after 
the completion of his work, while the machinist is 
paid the same amount, one hundred and ten dollars, 
upon the completion of his work. But suppose 
that, despite such protest, society should insist upon 
this mode of distribution, what would result? So 
long as it remained true that men prefer present 
goods to future goods, all men would seek to enter 
those industries or branches of employment that 
turned out finished products. This must force down 
the wages in such industries as compared with those 
more remote from the finishing process until a suf- 
ficient premium were established to induce men to 
engage in these latter industries. In other words, 
though there were no capitalist to exploit the laborer, 
interest must arise in order to satisfy that " idea of 
pure justice" to which Rodbertus has appealed in 
his attack upon interest." 

In passing upon the work of the socialist, it must 
be remembered that their errors are due in no small 
degree to the defective analysis of the orthodox econ- 
omists. Profits and interest are so frequently em- 
ployed by the latter writers as interchangeable terms, 
that it is hardly to be wondered at that the socialists 



158 VALUE AND DISTRIBUTION. 

should direct their attack against the whole complex 
return secured by the capitalist. Later investiga- 
tions have shown that in this total or complex re- 
turn for the use of concrete forms of capital there 
are several different forms of surplus, — rent, profit, 
and interest. And that no matter how open the 
first two of these forms may be to the line of attack 
employed by socialist writers, the last is absolutely 
impregnable against such attacks, and this for the 
reason that it is a case of normal value, and so is de- 
termined under conditions of ideal free competition. 
The importance of the work done by the socialist 
writers lay largely in their vigorous protest against 
the assumption of an economic man, the iron law 
of wages, etc. Their constructive contributions to 
economic theory, however, should not be ignored. 
The accent which they have thrown upon the inti- 
mate connection that exists between the phenomena 
of value and price on the one side and the phe- 
nomena of distribution on the other is important. 
Again, as I shall endeavor to show in a later chapter, 
it was Marx who first recognized the important dis- 
tinction between labor in the concrete form of spin- 
ner, weaver, etc., and labor conceived as an abstract 
mobile fund. The similarity between capital and 
labor in this respect Marx, of course, failed to notice, 
but that he had some grasp of these two conceptions 
of labor can, we think, be shown. These are the 
conceptions which J. B. Clark has developed with 
such skill and clearness. 



CHAPTER III. 

THE USE THEORY OF INTEREST. 

The advocates of the Cost Theory of Value held 
that under free competition the value of a product 
cannot exceed its cost of production, from this it 
follows that the value of the share of this product 
which is due to the use of capital cannot exceed the 
value of that capital. This raises the question, How, 
then, are we to explain the fact that the share of the 
product that goes to the owner of capital frequently 
contains a surplus above the value of the capital 
itself, a surplus to which the name interest has been 
given ? In attempting to explain this seeming con- 
tradiction the question arose whether there was not 
some other sacrifice than that represented by the 
capital itself. If there is such an additional sacri- 
fice, it might be equated to this surplus value or 
interest. In that case the Cost Theory would still 
remain true, since the value of the product would 
again equal its cost of production. The search for 
this additional sacrifice has resulted in two distinct 
theories of interest, — the Use Theory and the Ab- 
stinence Theory. It is to an examination of the 
first of these theories that the present chapter will 
be devoted. 

The Use Theory asserts, in brief, that in capital- 
istic production there is a sacrifice not only of the 

159 



160 VALUE AND DISTRIBUTION. 

material substance of capital but also a sacrifice of the 
use of the capital during the period of production. 

This theory had a large following, especially among 
the abler German economists, — Herman, Nebenius, 
and others giving it their support. Its best and 
fullest statement is found in the work of the bril- 
liant Austrian economist, Carl Menger. His ap- 
proach to the question is, however, somewhat differ- 
ent from that of the earlier writers, since he starts 
out from the stand-point of the Marginal Utility 
Theory of Value. But for this very reason it is 
undoubtedly the best possible statement of the Use 
Theory of Interest. 

80. Menger's Statement of the Theory. — This 
writer first holds that in value the causal relation is 
not, as the older economists held, from value of pro- 
ductive goods to value of product, but from value 
of product to value of productive goods. It must, 
however, be borne in mind that whichever order is 
accepted, it still remains true that, under free compe- 
tition, the value of the product and the value of the 
productive good are necessarily equal. How, then, 
can the existence of surplus value or interest be ex- 
plained ? 

To this Menger gives the following answer : " The 
transformation of means of production into products 
(or, shortly, Production) always demands a certain 
period of time, sometimes long, sometimes short. 
For the purpose of production it is necessary that a 
person should not only have the productive goods at 



THE USE THEORY OF INTEREST. 161 

his disposal for a single moment inside that period of 
time, but should retain them at his disposal and bind 
them together in the process of production over the 
whole period of time. 

" The use of capital, or the disposal over capital, 
thus described, in so far as it is in demand and is not 
to be had in sufficient quantity, may now obtain a 
value, or, in other words, may become an economical 
good. When this happens, as is usually the case, 
then, over and above the other means of production 
employed in the making of a concrete product (over 
and above, — e.g., the raw materials, auxiliary mate- 
rials, labor, and so on), there enters into the sum of 
value contained in the anticipated product the dis- 
posal over those goods that are required for the re- 
duction or the use of capital. And since, on that 
account, in this sum of value there must remain 
something for the economical good we have called 
' use of capital/ the other means of production can- 
not account for the full amount of the value of the 
anticipated product. This is the origin of the dif- 
ference in value between the concrete capital thrown 
into production and the product ; and this at the 
same time is the origin of interest." 

This theory clearly rests upon the contention that 
there is a use of capital which is separate and dis- 
tinct from that which is involved in the using up 
of the capital itself. It, therefore, follows that if this 
position cannot be maintained, the whole theory must 

be abandoned. 

11 



162 VALUE A.ND DISTRIBUTION. 

81. Criticism of Menger's Statement. — This theory 
seems to find some confirmation in our experience 
with durable consumption goods ; as in the case of a 
rented house. The house itself or the capital is re- 
turned to the owner at the expiration of the lease, in 
spite of the fact that it has been a source of income 
during the entire period of the lease ; it would here 
seem that there is a use of the house which is quite 
distinct from the using up of the house. 

If, however, the case of a more perishable good, as 
a plough, is examined, there is no difficulty in seeing 
that just as the rendering of services by the laborer 
involves a using up of human tissue, so the render- 
ing of services by a material commodity involves the 
using up of its tissue. The only difference between 
the cases of perishable and durable goods lies in the 
fact that the perishable goods are more rapidly con- 
sumed. A moment's consideration will make it clear 
that even in the case of the more durable consump- 
tion goods there is of necessity the same breaking 
down of tissue. They do not render all of their 
services at once, as in the case of powder, but instead 
only a small part of their possible services are given 
off at a time, while a balance, so large that it seems 
to be the whole, remains in the possession of the 
owner. It is this fact that seems to give warrant to 
the assumption that there is a use of capital that can 
be separated from the using up of the capital. And 
yet one has only to consider it well to realize that 
there is no conceivable use of any form of capital, not 



THE USE THEORY OF INTEREST. 163 

even the most durable, that does not involve a using 
up of that capital. As Bohm-Bawerk has well said, 
" Any use of material goods which does not consist 
in the receiving from them of useful results due to 
their inherent powers or forms of energy is abso- 
lutely unthinkable." 

Yet, despite the complete breaking down of the 
Use Theory, when critically examined, it had one 
great merit. It accented the importance of the time 
element in all capitalistic production. This proposi- 
tion will be fully developed in the discussion of 
Time and Space Utilities, page 183. For the present 
it should be noted that, whatever the shortcomings 
of the Use Theory may be, it must be credited with 
a clear appreciation of this time function in the 
problem of interest.* 

* Those desiring a fuller review of the "Use Theory" than 
is here given are referred to Bohm-Bawerk' s " Capital and 
Interest," Book III. 



CHAPTER IV. 

THE EARLIER PRODUCTIVITY THEORY OP INTEREST. 

I. CONTINENTAL WRITERS FAIL TO SEE THAT INCREASE IN 
PRODUCT DOES NOT NECESSARILY MEAN AN INCREASE IN 
VALUE. 

82. Say. — Among the first to give definite state- 
ment to this theory was J. B. Say, who wrote : " The 
impossibility of obtaining a product without the co- 
operation of some form of capital compels the con- 
sumer to pay for that product a price sufficient to 
allow the entrepreneur, who takes on himself the work 
of production, to buy the services of that necessary 
instrument." * Again, he writes : " If capital had 
not in itself a productive power, independent of the 
labor that has created it, how could it be that capital, 
to all eternity, produces an income independent of the 
profit of the industrial activity which employs it ?" f 

That in some way a surplus accrues to the benefit 
of those that control this particular instrument of 
production is, of course, granted by all parties to the 
discussion ; but the question is, How does this surplus 
arise ? Nor is it a satisfactory answer to tell us that 
since " capital to all eternity produces an income," 
therefore capital must be productive. For the so- 

* Traite d'Economie Politique, p. 395. 
f Ibid., p. 71. 
164 



THE EARLIER PRODUCTIVITY THEORY OF INTEREST. 165 

cialist might answer that the capitalist secures a sur- 
plus by exploiting the laborers under the protection 
of law and custom. Yet despite this serious ellipsis 
in Say's argument his views obtained wide acceptance 
in both France and Germany. 

83. Riedel. — Among Germans, Kiedel writes: "The 
productivity which capital when employed univer- 
sally possesses is manifest, in observation of the fact 
that material values which have been employed, with 
a view to production, in aiding nature and labor are, 
as a rule, not only replaced, but assist towards a 
surplus of material values, which surplus could not 
be brought into existence without them. . . . The 
product of capital is to be regarded as that which 
in any case results from an employment of capital 
towards the origination of material values, after de- 
duction of the value of that assistance which nature 
and labor afford to the employment of capital. . . . 
It is always incorrect to ascribe the product of capi- 
tal to the working forces of nature or labor which 
the capital needs in order that it may be employed. 
Capital is an independent force, as labor and nature 
are, and in most cases does not need them more than 
they need it." * 

The point of paramount importance in these pas- 
sages is found in the opening statement, that the pro- 
ductivity of capital is manifest on observation of the 

* National Oekonomie oder Yolkswirthschaft, 1838. (1 § 
366.) 



166 VALUE AND DISTRIBUTION. 

surplus value, which could not be brought into exist- 
ence without this capital. One is here constrained to 
ask, How do we get this surplus value ? Surplus of 
material commodities may be granted, but how is this 
transmuted into a " surplus of material values" ? 
This, indeed, is the crucial point in this whole dis- 
cussion, yet it is one which these continental writers 
failed even to raise. They show, and have no trouble 
in showing, the productivity of capital in terms of 
physical commodities, but nowhere do they attempt 
to show how or why this is equivalent to an increase 
in value. They simply assume this step in the argu- 
ment. 

It does not meet the difficulty to say that, as a 
matter of fact, the employment of capital usually 
results not merely in a surplus of commodities but 
as well in a surplus of value. The question that 
troubles us is not one of fact, but the reasons for this 
fact, or the explanation of the process by which this 
fact is realized. When we say the productivity of 
capital is manifest from the observation of the exist- 
ence of surplus value, we simply avoid the real diffi- 
culty in the matter. The only thing assured in the 
so-called productivity of capital is the increase in 
commodities. But that this does not necessarily 
imply an increase in value is manifest, for with the 
increase of commodities there is usually a correspond- 
ing decrease in marginal utility or of value, as we 
ordinarily use this latter term. 

Suppose, for instance, that in the present condition 



THE EARLIER PRODUCTIVITY THEORY OF INTEREST. 167 

of the shoe industry a given amount of labor would 
produce one hundred pairs of shoes, and that with 
this supply on the market shoes would have a mar- 
ginal utility of 10. Later, a new machine is intro- 
duced, so that with the same amount of labor we can 
produce two hundred pairs of shoes. Let us further 
assume that with this supply shoes will have a mar- 
ginal utility of 4. Here, then, we would have a very 
positive increase of commodities with an equally 
serious decrease in the marginal utility or value per 
unit. It is true that there is still another sense in 
which the term value is employed, — namely, total 
value. But it may readily happen that even this 
may decline with the increase in quantity. For — 
100 X 10 = 1000 units of total value. 
200 X 4 = 800 units of total value. 

In other words, the increase in commodities has 
resulted not only in a decline in marginal utility, or 
value per unit, but likewise in a decline of total 
value, so that in no sense has there been an increase 
in value. 

So far, then, as these earlier writers are concerned, 
they have nowhere shown the existence of a surplus 
value due to the productivity of capital. They have 
no difficulty in showing a surplus in material com- 
modities, but they have not shown, nor can they 
show, that this necessarily results in an increase of 
value. Men may increase their product to any ex- 
tent they please, but unless these products are such 
as are desired by society, they can have no value. 



l(3g VALUE AND DISTRIBUTION. 

In other words, value depends not merely upon pro- 
duction, but upon consumption as well. 

II. ENGLISH WRITERS SAW THAT INCREASE IN PRODUCT 
DOES NOT NECESSARILY MEAN AN INCREASE IN VALUE, 
BUT FAILED TO SUPPLY THE ELLIPSIS IN THE ARGU- 
MENT. 

In England Lauderdale and Malthus attempted to 
fill out the ellipsis in the arguments of the conti- 
nental adherents of the productivity theory of in- 
terest by inserting a middle term that would serve to 
connect surplus product with surplus value. 

84. Lauderdale. — This writer tells us that "In 
every instance where capital is so employed as to 
produce a profit it uniformly arises either from its 
supplanting a portion of labor which would other- 
wise be performed by the hand of man, or from its 
performing a portion of labor, which is beyond the 
reach of the personal exertions of man to accomplish. 

" Suppose, for example, one man with a loom 
should be capable of making three pairs of stock- 
ings a day, and that it would require six knitters to 
perform the same work with equal elegance in the 
same time ; it is obvious that the proprietor of the 
loom might demand for making his three pairs of 
stockings the wages of five knitters, and that he 
would receive them ; because the consumer by dealing 
with him rather than the knitters would save in the 
purchase of the stockings the wages of one knitter."* 



* Inquiry into the Nature and Origin of Public "Wealth, 
pp. 161, 165. 



THE EARLIER PRODUCTIVITY THEORY OF INTEREST. 109 

It is in this saving of labor, then, that this writer 
would find the middle term, or his explanation of 
interest on capital. But the question may well be 
asked, Has he really said anything bearing upon 
that form of surplus value which here interests us ? 
He has shown that the capitalist will receive a sur- 
plus value over and above his labor cost of produc- 
tion, but as this surplus includes the wear and tear 
of capital, it is not a surplus of value over and 
above the maintenance of the original capital. In 
other words, it is not interest. 

Lauderdale seems to feel in a vague way the un- 
satisfactory nature of his solution, for he says, " The 
small profit which the proprietors of machinery 
generally acquire, when compared with the wages 
and labor which the machine supplants, may per- 
haps create a suspicion of the rectitude of this 
opinion. Some fire-engines, for instance, draw more 
water from a coal-pit in one day than could be con- 
veyed on the shoulders of three hundred men, even 
assisted by the machinery of buckets ; and a fire- 
engine undoubtedly performs its labor at a much 
smaller expense than the amount of the wages of 
those whose labors it thus supplants. This is, in 
truth, the case of all machinery." 

But this, he says, is simply due to the fact "that 
the profit obtainable for the use of any machine 
must be regulated by the universal regulator of 
prices, the relation of supply and demand." In 
other words, if every one is free to produce such an 



170 YALUE AND DISTRIBUTION. 

engine, its value cannot exceed its cost of produc- 
tion. 

But it might be asked, if free competition presses 
down the value of the machine, will it not also press 
down the value of the products of that machine? 
For as long as the machine yields a profit other 
machines will be produced and their products in- 
creased until this profit disappears. The real ques- 
tion at issue is, Why does this competing process 
cease while there still remains that portion of this 
profit which we call interest. 

85. Malthus, who in general follows Lauderdale 
quite closely, seems at times to have recognized this 
weakness in the argument, and to feel that in the 
formation of interest there was more to be considered 
than the productivity of capital. He sees that com- 
petition must always leave a share for the capitalist, 
or, in other words, that profit in the sense of interest 
is an essential part of the cost. He sees that over 
and above the direct sacrifice of labor there is an- 
other form of sacrifice which is endured by the capi- 
talist, and which he will not endure without compen- 
sation. In other words, Malthus goes behind the 
limitation of the supply of capital to inquire as to 
the cause of this limitation. For he urges that " the 
gradual diminution in the rate of profit must in the 
long run bring the power and the will to accumu- 
late capital to a stand-still." * 

* Principles of Political Economy, p. 303. 



THE EARLIER PRODUCTIVITY THEORY OF INTEREST. 171 

But in his apprehension of this truth Malthus is 
not very persistent. For the most part he contents 
himself, as did Lauderdale, with the explanation that 
the rate of profit was a question of supply and de- 
mand, and only on rare occasions does he trouble 
himself to go back of this and inquire what it is that 
limits this supply. 

86. Ellipsis in the Argument of the Advocates 
of Productivity. — It seems, then, that the various 
attempts to formulate a productivity theory of in- 
terest have either assumed that the employment of 
capital necessarily resulted in an increase in value, 
or have noted that it resulted in an increase in com- 
modities, and have then assumed that this was the 
same as an increase in value. None of them have 
succeeded in supplying the ellipsis between these 
two phenomena. In other words, they have failed 
to show the creation of a surplus of value over and 
above the amount necessary to maintain the existing 
supply of capital. 

III. INCREASE IN PRODUCT IS NOT A NECESSARY CONDITION 
OF INTEREST. 

87. Bohm-Bawerk fails to recognize the Cause 
of the Confusion. — Bohm-Bawerk's criticism of the 
various attempts to formulate a productivity theory 
of interest is in many respects most admirable. He, 
however, fails to recognize the ultimate source of all 
their difficulties, — the unwarranted assumption that 
increase in product is a necessary condition of in- 



172 YALUE AND DISTRIBUTION. 

terest. He accents the physical productivity of capi- 
tal so strongly that it even seems to be an essential 
condition of his own theory of interest. That he is 
in error on this point we hope to show on pages 209 
to 211. For the present we must content ourselves 
with urging that the physical productivity of capital, 
in the sense of an increase in quantity of product, 
though a frequent incident, is not a necessary condi- 
tion of the phenomenon of interest.* 

* It will hardly be necessary to call attention to the fact 
that in this review of the various theories of interest we 
have drawn very freely upon Bohm-Bawerk's " Capital and 
Interest." 



CHAPTER V. 

THE ABSTINENCE THEORY OF INTEREST. 

Both Smith and Malthus seem to have had some 
conception of the abstinence theory of interest. 
Smith writes : " In all countries where there is tol- 
erable security every man of common understanding 
will endeavor to employ whatever stock he can com- 
mand in procuring either present enjoyment or future 
profit"* Again, Malthus writes: "The gradual 
diminution in the rate of profit will in the long run 
bring the power and the will to accumulate capital" 
to a standstill.*!* 

88. Senior's Statement of the Theory. — The 
above antithesis was seized upon by Senior when, 
some years later, he elaborated the now well-known 
"Abstinence Theory of Interest." He writes: "The 
conduct of a person who either abstains from the 
unproductive use of what he can command, or de- 
signedly prefers the j)roduction of the remote to that 
of the immediate results," etc. J Senior, however, 
does not include capital among the primary factors 
of production, but holds that it is a product of the 
factors labor, natural agents, and abstinence. In 

* Wealth of Nations, Book II. Chap. I. 
f Principles of Political Economy, p. 303. 
% Outlines of the Science of Political Economy, p. 58. 

173 



174 VALUE AND DISTRIBUTION. 

other words, it is not capital but abstinence that is 
the original factor, since it stands in the same rela- 
tion to interest that labor does to wages. 

In our review of the Use Theory of Interest we 
saw that the capitalist usually secures not only the 
return of his original investment, but in addition a 
surplus in value, to which the term interest is ap- 
plied. This seemed, however, to conflict with the 
contention that value is determined by cost. The 
advocates of the Use Theory endeavored to get over 
this difficulty by insisting that besides the sacrifice 
involved in the using up of capital there was an 
additional sacrifice of the use of the capital during 
an interval of time. This latter use of capital, 
which they regarded as a separate and distinct sacri- 
fice from the using up of capital, they equated to the 
surplus in value or to interest. The advocates of the 
Abstinence Theory have endeavored to account for 
this surplus value by equating it to the disutility or 
sacrifice of abstinence. If men make a sacrifice by 
postponing present enjoyment, and devote the re- 
sources so spared to the purposes of production, it is 
manifest that the resulting increase in product is 
very intimately connected with the saving which 
made possible the adoption of the more productive 
methods. In other words, the cost of production 
must include not only the labor and capital that is 
used up in the process of production, but also the 
disutility involved in the postponement of present 
enjoyment, or, in brief, abstinence. The surplus 



THE ABSTINENCE THEORY OF INTEREST. 175 

value that results from capitalistic methods of pro- 
duction is in this way equated to a disutility and the 
law of cost is maintained in its integrity. Here, in 
a very brief way, we have the statement of a theory 
that has provoked the most violent denunciation on 
the part of socialist writers and the less violent but 
equally pronounced opposition of the Austrian econo- 
mists ? * 

89. Lasalle's Philippic. — It was against this theory 
that Lasalle launched the oft-quoted philippic, — 
" The profit of capital is the ' wage of abstinence.' 
Happy, even priceless expression ! The ascetic mil- 
lionaires of Europe ! Like Indian penitents or pil- 
lar saints they stand ; on one leg, each on his column, 
with straining arm and pendulous body and pallid 
looks, holding a plate towards the people to collect 
their wages of abstinence. In their midst, towering 
up above all his fellows, as head penitent and ascetic, 
the Baron Rothschild ! This is the condition of so- 
ciety ! how could I ever so much misunderstand it?"f 
This on the part of the well-meaning but seldom well- 
tempered champion of the masses may readily be par- 
doned, but that the Austrian economists who insist so 
strongly upon the importance of the marginal concept 
in economic theory should find anything to commend 
in this ill-considered tirade is somewhat surprising. 

* It may be well to call attention to the important part 
played by the theory of value in these discussions of the 
theory of interest. 

f Capital and Interest, p. 276. 



176 VALUE AND DISTRIBUTION. 

90. Bohm-Bawerk's Contention. — And yet Bohm- 
Bawerk has written: "It is just as certain — and on 
this ground Lasalle is for the most part right as 
against Senior — that the existence and the height of 
interest by no means invariably correspond with the 
existence and height of a sacrifice of abstinence. In- 
terest, in exceptional cases, is received where there 
has been no individual sacrifice of abstinence. High 
interest is often got where the sacrifice of abstinence 
is very trifling, as in the case of Lasalle's million- 
aire, and low interest is often got where the sacrifice 
entailed by the abstinence is very great. The hardly 
saved sovereign which the domestic servant puts in 
the savings-bank bears, absolutely and relatively, less 
interest than the lightly spared thousands which the 
millionaire puts to fructify in debenture and mortgage 
funds. These phenomena fit badly into a theory 
which explains interest quite universally as a ' wage 
of abstinence,' and in the hands of a man who under- 
stood polemical rhetoric so well as Lasalle they only 
furnished so many pointed weapons of attack against 
that theory." * 

91. Reply to Bohm-Bawerk. — It is manifest that 
we have only to apply this same sort of criticism to 
the utility theory of value to show that it likewise is 
untenable. How can you say that value is deter- 
mined by utility when, by confession, all the earlier 
increments yield a higher utility than those consumed 



* Capital and Interest, p. 277. 



THE ABSTINENCE THEORY OF INTEREST. 177 

later on ? Shall we not, then, reject the proposition 
that value depends upon utility? As a matter of 
fact we do nothing of the kind, but continue to insist 
that value depends upon marginal utility. So, too, 
interest is not determined by the abstinence or lack 
of abstinence of a Rothschild, but by the abstinence 
or disutility endured by the marginal saver. For it 
is his sacrifice of present enjoyment that determines 
the creation of an additional supply of capital. 

92. Another Objection to the Abstinence Theory. 
— Bohm-Bawerk has still another objection to the 
abstinence theory. He writes : " I consider it a logi- 
cal blunder to represent the renunciation or post- 
ponement of gratification, or abstinence, as a second 
independent sacrifice in addition to the labor sacri- 
ficed in production." (" Capital and Interest," p. 
278.) 

" In any case it appears to me obvious that, in 
reckoning the sacrifice made for any economic end, 
the direct sacrifice in means — that sacrifice which is 
first made — and the indirect sacrifice that takes the 
shape of other kinds of advantage that might have 
been obtained in other circumstances by the means 
sacrificed, can be calculated only alternately and 
never cumulatively. I may consider the sacrifice of 
my pleasure trip to be either the thirty pounds which 
it has directly cost me, or the Persian carpet which 
it has indirectly cost me, but never as the thirty pounds 
and the carpet. Just in the same way our rustic may 
consider, as the sacrifice which the catching of three 

12 



178 VALUE AND DISTRIBUTION. 

fish costs him, either the day's work directly ex- 
pended, or the three hares indirectly sacrificed (or, 
say, the gratification he gets from eating them), but 
never the day's work and the gratification obtained 
through shooting the hares. So much, I think, is 
clear." (Page 279.) 

On page 283 we find this argument put in a little 
more definite form : " Suppose we feel the pain of a 
day's labor as an amount which may be indicated by 
the number 10. We actually employ the day in 
catching three fish', and these fish give us a gratifi- 
cation expressed by the number 15. . . . What our 
three fish cost us in this case is the labor-pain, indi- 
cated by the number 10. . . . 

" If, on the other hand, it is possible, by laboring 
for a day at other kinds of work, to get a gratifica- 
tion greater than the pain represented by the num- 
ber 10, if we could, e.g., by a day's shooting, obtain 
three hares of the value of 12, then it is quite rea- 
sonable to expect that we would not in any case re- 
main idle, but possibly go shooting instead of fishing. 
What our fish really cost us now is not the positive 
labor-pain expressed by the number 10, for this we 
should have undergone at any rate, but the negative 
loss of an enjoyment which we might have had, indi- 
cated by the number 12. But, of course, we must 
never calculate the want of employment and the pain 
of labor cumulatively ; for if we had not preferred 
catching fish, we could not have spared ourselves the 
pain of labor and yet have had the gratification of 



THE ABSTINENCE THEORY OF INTEREST. 179 

shooting. And just as little, if we choose to fish, do 
we by that choice make a double sacrifice." * 

93. Reply to this Objection. — If the utility which 
might have been secured by hunting for hares is 12, 
then it follows that this 12 represents the total pos- 
sible sacrifice incurred in securing the fish. In other 
w T ords, we cannot add to this either 10, the pain of 
labor, or any part thereof. If this is what Bohm- 
Bawerk intends to say, I am in entire agreement 
with him. But when he writes that " if the work is 
reckoned as sacrifice, there cannot be added to that 
in the calculation the smallest fragment of the other 
kinds of enjoyment that were renounced" (page 
280), I am compelled to part company with him. 
He seems to regard this proposition as the converse 
of the previous one, in which he declares that if the 
sacrifice is estimated in terms of the gratification 
which might have been got through the work, then 
not the smallest portion of the work itself can be 
reckoned in the sacrifice. As a matter of fact, they 
are essentially different propositions. For if the 
sacrifice is measured in terms of the postponed grati- 
fication, 12, no addition is necessary or possible, but 
if it is estimated in terms of the pain of labor, some 
addition is both possible and necessary. The post- 
poned gratification of 12 is clearly resolvable into 
the pain of labor of 10, and an additional allowance 
of 2 for the gratification which might have been 

* Capital and Interest, p. 284. 



180 VALUE AND DISTRIBUTION. 

secured by hunting for hares. Hence, if work is 
reckoned as sacrifice, we must add to the pain of 
labor, 10, an additional amount, 2, if we wish to know 
the total sacrifice. 

In other words, it is not a necessary interpretation 
of the abstinence theory to say that to the pain of 
labor you must add the total pleasure which would 
have been obtained by the immediate consumption of 
the capital. What the abstinence theory does say is, 
that to the pain of labor we must add such an amount 
as will induce the marginal saver or capitalist to 
postpone his enjoyment; an amount that is much 
smaller than the total pleasure which might be de- 
rived from the immediate consumption of the pros- 
pective capital. And the reason that we must pay 
him something is, as Bohm-Bawerk has so well shown, 
that " in circumstances otherwise equal men prefer a 
present to a future enjoyment." 

94. Still another Objection to the Abstinence 
Theory. — The Austrian economists have still another 
and, to their minds, a more serious objection to the 
abstinence theory. It is here, indeed, that they re- 
veal the real animus of their opposition to this theory. 
Bohm-Bawerk writes : " The third fault of Senior's 
theory seems to be that he has made his interest 
theory part of a theory of value in which he explains 
the value of goods by their costs." (Page 285.) 
" Now, even admitting the correctness of this theory, 
the ' law of costs' avowedly holds only as regards one 
class of goods, — those which can be reproduced in 



THE ABSTINENCE THEORY OF rNTEEEST. 181 

any quantity at will. In so far, then, as Senior 
makes his theory of interest an integral part of a 
value theory which is merely partial, it can only be, 
in the most favorable circumstances, a partial inter- 
est theory. It might explain those profits which are 
made in the production of goods reproduced at will, 
but logically every other kind of profit would escape 
it altogether." (Page 286.) 

In a later chapter we shall endeavor to show that 
the only part of the old complex profit that can be 
included under interest is such as will arise under 
conditions of free competition, or that interest is a 
problem in normal value. If this is true, then the 
above objection to the abstinence theory falls to the 
ground, for the only portion of general profits which 
that theory is called upon to explain is such as is 
realized under conditions of free competition. 

While the Austrian economists have failed to es- 
tablish their several contentions against the absti- 
nence theory of interest, it still remains true that any 
theory that takes cognizance of abstinence alone must 
fail to account in an entirely satisfactory way for the 
phenomena of interest. For it matters not how much 
a commodity may cost, it cannot have value unless it 
also serves some utility. Hence in any satisfactory 
theory of interest abstinence and productivity must 
needs supplement each other, and to these must be 
added some adequate explanation of the part played 
by time in the phenomenon of interest. Later on it 
will be shown that Bohm-Bawerk, in the most sue- 



182 VALUE AND DISTRIBUTION. 

cessful attempt that has yet been made to construct 
a theory of interest, has taken cognizance of all 
three of these elements, — this despite his formal and 
somewhat vehement repudiation of abstinence as a 
factor in the determination of interest. 



CHAPTER VI. 

INTRODUCTION TO THE EXCHANGE THEORY OF 
INTEREST. 

Bohm-Bawerk, in the development of this theory 
of interest, devotes considerable space to the discus- 
sion of certain fundamental concepts which he re- 
gards as underlying the exchange theory of interest. 
Some acquaintance with this part of his argument is 
therefore necessary to a clear understanding of his 
discussion of the interest problem. Most text-books 
on economics reduce all possible manifestations of 
utility to three primary forms, — utilities of place, 
form, and time : utility of place, as when ice is trans- 
ported from the rivers of Maine to Southern towns 
and cities ; utility of form, as in the artificial produc- 
tion of ice ; utility of time, as when ice is cut in win- 
ter and stored until the following summer. The only 
objection to this analysis is that it does not recognize 
the fact that the first and second of these utilities are 
at the bottom one and the same. Whether we trans- 
port the block of marble from the quarry or chisel 
off the unnecessary parts in fashioning it into a statue, 
we are in both cases creating space utilities, so that 
in reality there are but two fundamental forms of 
utility, — those of space and those of time. 

95. Capital is concerned with Time Utilities. — 
It has been said that man in all his efforts simply 

183 



184 VALUE AND DISTRIBUTION. 

places things where the natural forces may operate 
upon them, and so, whether he grows wheat in Da- 
kota and transports it to Liverpool, or hews from a 
block of marble a statue that delights mankind for 
centuries to come, he is but moving things or changing 
their space relations. In his productive activities, 
however, he seeks to minimize his own efforts by 
availing himself, as far as possible, of the natural 
forces around him. In doing so he is compelled to 
adopt capitalistic or roundabout methods of produc- 
tion. Here, as elsewhere, he can only gain power 
by a sacrifice of time, for it is a fact of every-day ex- 
perience that the operations of these natural forces 
involves an appreciable interval of time. From this 
we are led to conclude, a priori, that while labor may 
have to deal primarily with space utilities, capital is 
in some way necessary to the securing of the time 
utilities, and hence that interest per se is a payment 
for such time utilities.* 

Take the German forests, for instance, which were 
largely planted by man. The care or labor of man 
is here but an insignificant element in the growing 
value of the tree. In a qualified way it might be 

*I have here followed the usual treatment of this part of 
the subject, and have assumed that the expenditure of labor 
force does not require an appreciable interval of time. In 
the discussion of the Normal Value Theory of Wages, page 
290, it will be shown that this assumption is not true. The 
recognition of this fact necessarily results in a serious modifi- 
cation of the theory of wages. 



INTRODUCTION TO THE EXCHANGE THEORY. 185 

said that man's labor was confined to placing the 
acorn in the ground under conditions favorable to its 
growth. For the rest, it must largely be credited to 
nature herself. Yet this growing tree and its conse- 
quent increase in value is just as truly capitalistic 
production as the manufacture of watches. The 
former instance, however, serves to bring out a little 
more clearly the fact that time is necessary if we are 
to avail ourselves of the natural forces that year after 
year add to the bulk and value of the tree. 

Again, let us take the case of the wine that in- 
creases in value with the passing years. So far as 
labor is concerned, the productive operation is prac- 
tically completed with the storing of the wine ; yet 
as the years go by the forces of nature are oper- 
ating upon this wine, making changes so subtle that 
chemical analysis can take no cognizance of them, 
but which the connoisseur recognizes, and for which 
he is willing to pay. Here, too, it is clear that 
while it is the free forces of nature that bring about 
this change, these forces do not work instantaneously. 
In other words, time is a necessary condition in the 
creation of this surplus value. 

Nor is there any difficulty in seeing that the same 
condition exists in manufacturing processes ; though 
there is a seeming complication, due to the facts, first, 
that the interval of time is frequently shorter, and 
second, that labor and nature are here contempora- 
neous in their operation. Yet, after all, the most 
complex machine is but a combination of levers, and 



186 VALUE AND DISTRIBUTION. 

in every lever we only gain power by a sacrifice of 
time. 

96. The Rationale of Machine Methods of Pro- 
duction. — It has just been shown that in the case 
of complex machines, as of the more simple tools, 
power is gained by a sacrifice of time. A brief in- 
quiry as to the rationale of this machine method of 
production may help to still further clarify our ideas 
on this point. In the direct removal of rocks, etc., 
the necessary forces are much less easily controlled 
by man than are the forces necessary to the fash- 
ioning of the hammer and wedge. Again, just as 
the hammer and wedge were used in the struggle 
with the rock and similar impediments, so in the 
making of the hammer and wedge other tools are 
used more primitive still, it may be, but at least 
more easily manipulated, while in the production of 
these remote tools others are employed that are still 
more easily manipulated. In other words, every suc- 
cessful roundabout method of production involves the 
carrying back of the production process to forces of 
nature that are more and more readily controlled ; at 
every step powers are invoked that are stronger and 
more cunning than the human hand ; this means that 
there is a constant shifting of the burden of produc- 
tion from the costly labor of man to the harnessed 
powers of nature. 

97. Machine Production not a Necessary Con- 
dition of Interest. — The employment of a machine 
or tool, however, is not a necessary condition of in- 



INTRODUCTION TO THE EXCHANGE THEORY. \^J 

terest ; thus in the case of the German forests, this 
phase of the phenomena is almost entirely elimi- 
nated ; and again in the case of aging wine and 
bleaching linen, the machine and tool play an in- 
significant part, though in the case of wine the 
storage vaults clearly take their place. From this 
it follows that wherever man and nature have co- 
operated in the production of a commodity which 
requires an appreciable interval of time to fully 
mature its value, the phenomenon of interest exists ; 
and hence that under the term Capital must be in- 
cluded not only tools, machines, or plant in gen- 
eral, but also all intermediate products. It would 
seem from this that economists should have little 
difficulty in determining just what is meant by capi- 
tal ; and yet there is probably no term whose defini- 
tion has given rise to more serious discussion. 

98. The Definition of Capital. — We have already 
seen that in early times where loans were made rather 
for purposes of consumption than of production, the 
word capital came to signify the money loaned. Later 
on, Hume maintained that interest depends not on 
the supply of money but upon the stock of wealth 
of the community. Turgot made a still further ad- 
vance and defined capital as the goods saved from 
consumption. But this, since it still included all 
wealth, was manifestly too broad a definition. Adam 
Smith took the next step, and distinguished capital 
from consumption goods or from wealth as a whole 
by saying that " capital includes the saved stocks," 



188 VALUE AND DISTRIBUTION. 

meaning by stocks those goods that are dedicated to 
production. He also saw quite clearly the difference 
between private and social capital, or that the sum 
of all the private capital might exceed the total social 
capital, since the former included claims upon the 
members of society, while the latter only included 
means of production. 

Looked upon as a source of income, private capital 
is the more general, and was indeed the original con- 
cept. For the purposes of the economist, however, 
social capital is the all-important phenomenon, and 
it is largely to this that economists have sought to 
confine the term, and so have defined capital either 
with Adam Smith as " the produced means of pro- 
duction," or with Bohm-Bawerk as " the sum of in- 
termediate products." 

99. Difficulties encountered by this Definition. — 
Clear and succinct as these definitions appear to be, 
the moment we attempt to apply them considerable 
differences of opinion arise. Without entering into 
this discussion in any detailed way, it may be said 
that these differences are due to the difficulty en- 
countered when we attempt sharply to distinguish 
between production and consumption goods. This, 
of course, is th,e difficulty that confronts all attempts 
at exact definition where we have to deal with such 
fluent phenomena. We know in a general way the 
difference between animal and vegetable life, yet who 
has succeeded in constructing definitions for these 
terms that will sharply distinguish between the lower 



INTRODUCTION TO THE EXCHANGE THEORY. 189 

forms of animal and the higher forms of vegetable 
life, or, again, between life and non-life ? In much 
the same way the phenomena of production and con- 
sumption are continuous, at least so far as the pro- 
ducing laborer is concerned. His consumption of 
food is, after all, but a point in the never-ending circle 
of production, and so from one point of view his food 
is a consumption good, while from another it is cer- 
tainly a produced means of production. And so we 
find that while Jevons includes all capital under con- 
sumption goods, Bohm-Bawerk would limit the latter 
to goods in the hands of the consumer. For he 
writes : " Finished consumption goods in the hands of 
producers and merchants as (warehouse) stock should 
be regarded as capital," or productive goods, but the 
same goods in the hands of the consumer are con- 
sumption goods and not capital. If we must draw an 
arbitrary line, this may be as good a point as any at 
which to draw it. Yet it would be difficult to show 
that the roundabout or capitalistic method of pro- 
duction stops at this point. Without dwelling upon 
the fact that delivery to consumers is part of the pro- 
duction process, it might be urged that goods may 
actually be delivered to the consumers long before 
the production process ceases. Bohm-Bawerk on 
more than one occasion refers to wine improving in 
quality and increasing in value with age, and indeed 
makes the explanation of this phenomenon the test 
to which all interest theories should be subjected. 
That this improvement in quality and increase in 



190 VALUE AND DISTRIBUTION. 

value frequently takes place in the cellar of the con- 
sumer cannot, of course, be denied. And yet when 
this writer holds that " finished consumption goods in 
the hands of producers and merchants as (warehouse) 
stock should be regarded as capital," he, by implica- 
tion, excludes such goods from this category if they 
are in the possession of the consumers. 

From this we are led to conclude that while for 
convenience it may be well to draw the line between 
production and consumption, between capital and 
non-capital goods, at the point of delivery to con- 
sumers, yet this, after all, is but a conventional dis- 
tinction. As long as goods are increasing in value, 
or rather as long as the lapse of time is a necessary 
condition to the realization of their full value, they 
are part of the world's capital stock whether in the 
hands of producer or consumer. It would seem, 
therefore, that we must not insist on too great pre- 
cision when we come to apply our definition of capi- 
tal to the concrete phenomena. 



CHAPTER VII. 

THE EXCHANGE THEORY OP INTEREST. 

The Exchange Theory of Interest rests upon the 
familiar experience that men generally prefer a pres- 
ent to a future enjoyment. This finds statement in 
the proposition that present goods are, as a rule, 
worth more than future goods. From this it results 
that he who exchanges present for future goods will 
demand some agio, some surplus in value, or, in 
brief, interest. 

It has just been shown that all production goods 
are part of capital, and that they cease to be capital 
the moment they have fully matured their value as 
consumption goods. From this it may readily be 
inferred that interest must in some way be equated 
to that difference in value between production and 
consumption goods which emerges with the lapse of 
time ; or again, in Bohm-Bawerk's terms, interest is 
the difference in value between present and future 
goods. 

The terms present and future goods are some- 
what unfortunate. Not the least of the difficulties 
in which these terms involve us is the fact that under 
this classification "goods of remoter rank (produc- 
tion goods) , although materially present commodities, 
are, economically, future commodities" according to 
Bohm-Bawerk's use of terms. Nor does any neces- 

191 



192 VALUE AND DISTRIBUTION. 

sity exist for confounding the discussion by intro- 
ducing new terms when the terms production and 
consumption goods are entirely satisfactory for the 
purposes of the discussion. But as serious objections 
will hereafter be taken to parts of the argument by 
which Bohm-Bawerk would maintain his Exchange 
Theory of Interest, it will be necessary to follow him 
in the use of the terms present and future goods. 
The reader may avoid some of the confusion by al- 
ways thinking of present goods as consumption goods 
and of future goods as production goods. 

I. PRESENT GOODS ARE WORTH MORE THAN FUTURE GOODS. 

" The very centre and kernel" of Bohm-Bawerk's 
theory of interest is the proposition that " present 
goods are, as a rule, worth more than future goods 
of like kind and number." It will be shown here- 
after that this proposition is not of such generality 
as this writer would have us believe. It is suffi- 
ciently general, however, for the purposes of his 
theory interest ; and our present task will be to in- 
quire why it is true, or how it is that men have come 
to value present goods more highly than future 
goods. 

100. Differences in Provision and Underestimate 
of the Future. — The productivity of capital is not, 
according to Bohm-Bawerk, the only cause of the 
higher valuation of j)resent goods. In his analysis 
of the phenomena he finds two other sources of the 
higher valuation of present goods. One is the fact 



THE EXCHANGE THEORY OF INTEREST. 193 

that many men are less efficiently provided for in 
the present than they hope to be in the future ; for 
this reason the marginal utility of present goods is 
relatively high. Again, even though the actual mar- 
ginal utilities of present and future goods were the 
same, yet there is a tendency of mankind to under- 
rate or discount anything in the future, due to the 
lack of vividness in our mental pictures of future 
phenomena; the present good, therefore, receives a 
higher valuation than is enjoyed by the future good 
at the present time. These two causes Bohm-Bawerk 
finds to be cumulative in their effect. 

101. Roundabout Methods of Production. — It is a 
fact of common experience that roundabout methods 
of production are generally more profitable than di- 
rect methods. It is not, of course, denied that ma- 
chines and processes frequently fail because they are 
too complicated or too roundabout in their mode of 
operation. Here, as elsewhere, the law of dimin- 
ishing returns may be called into play. Yet it still 
remains true that capitalistic or roundabout methods 
are in general adopted, and this because, on the whole, 
they yield a greater return. 

102. Technical Superiority of Present Goods. — It 
follows from what has just been said that if I have 
goods now in hand I can employ them in productive 
processes, and so secure that surplus which results 
from roundabout methods of production. In other 
words, present goods are more highly valued because 
of this productivity of capital. It was seen in the 

13 



194 VALUE AND DISTRIBUTION. 

discussion of the Productivity Theory of Interest 
that an increase in product is not necessarily an in- 
crease in value. Bohm-Bawerk endeavors, by a some- 
what elaborate argument, to bridge this chasm ; his 
success is, however, somewhat doubtful. He attempts 
to prove too much, to establish a general proposition 
when for the purposes of his theory the establishing 
of any such general proposition is entirely unneces- 
sary. For the present, however, we will assume that 
his thesis is in a large measure true, sufficiently so, at 
least, for the purposes of his theory of interest. It 
should also be noted that, while he recognizes that the 
first two causes (Difference in Provision and Under- 
estimate of the Future) are cumulative in their effect, 
he holds that this last cause (Technical Superiority) 
is alternate with them. 

To sum up, interest is the difference in value be- 
tween present and future goods. The superior value 
of present goods is due, on the one hand, to the differ- 
ence in provision between present and future and 
the tendency of mankind to underestimate all future 
phenomena ; on the other, to the productivity of 
capital. This in a very brief way is the Exchange 
Theory of Interest which Bohm-Bawerk has so ably 
developed. 



CHAPTER VIII. 

CRITICISM OF THE EXCHANGE THEORY OF IN- 
TEREST. 

I. ARE PRESENT GOODS WORTH MORE THAN FUTURE GOODS? 

" Present goods," writes Bohm-Bawerk, " are, as 
a rule, worth more than future goods of like kind 
and number. This proposition is the kernel and 
centre of the interest theory which I have to present. 
All the lines of explanation, by which I hope to 
elucidate the phenomena of interest, run through 
this fact ; and round it, both essentially and super- 
ficially, is grouped the whole of the theoretical work 
we have to do."* While the important bearing of 
this proposition upon the theory of interest will not 
be called in question in the present chapter, yet an 
endeavor will be made to show that the proposition 
is by no means of such generality as Bohm-Bawerk 
would lead us to suppose. 

103. Admitted Exceptions to this Contention. — 
In this same connection Bohm-Bawerk writes : " The 
only exception occurs in those comparatively rare 
cases where it is difficult or impracticable to keep the 
present goods till a time of worse provision comes. 
This happens, for instance, in the case of goods sub- 
ject to rapid deterioration or decay, such as ice, fruit, 

* Positive Theory of Capital, p. 237. 

195 



196 VALUE AND DISTRIBUTION. 

and the like." (Page 251.) Again, on page 297, he 
writes : " Lastly, it very seldom occurs, and then never 
as regards present and future goods in general, but 
only as regards one particular kind of goods, that the 
relations of supply and demand are such that future 
goods obtain a higher price than present goods of 
the same kind, and that a premium in present goods 
must be paid for future goods. It will only hap- 
pen in cases where, presumably, the relations of sup- 
ply and demand in the future will be essentially 
more unfavorable than in the present, and where, at 
the same time, for personal or technical reasons, it is 
not possible to preserve the present ample stock till 
that future point of time when they are assured of a 
higher value. Suppose the case of a brewer whose 
ice-cellars are too small for his requirements. If in 
January he puts in as much ice as the cellars will 
hold and has still two hundred carts of ice over, he 
may be very willing to exchange these for two hun- 
dred carts of ice deliverable in August." In a foot- 
note he adds : " Similar cases may perhaps occur after 
very abundant harvests, where the producers have 
not enough storage accommodation to secure the sur- 
plus." (Page 297.) 

104. Additional Exceptions. — Now, I would urge 
that those instances in which " a premium in present 
goods must be paid for future goods" are by no means 
so rare as this writer would have us believe. The fact is 
brought out quite clearly in the following tables, which 
were taken without expurgation from a daily paper. 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 197 

They are given at intervals of three months, and so 
display the course of prices during the entire year. 



January 2. 


April 2. 


July 2. 


October 2. 


Wheat No. 2. 


Wheat No. 2. 


Wheat No. 2. 


Wheat No. 2. 


Jan. .80 


April, .69$ 


July, .54| 


Dec. .90f 


May, .83f 


May, .70| 


Sept. .56$ 


May, .89* 


July, .79f 


July, .69f 
Sept. .67f 


Dec. .58 




Corn No. 2. 


Corn No. 2. 


Corn No. 2. 


Corn No. 2. 


Jan. .231 


April, .24f 


July, .26f 


Oct. .27f 


July, .26f 


July, .26 


Sept. .27f 


Dec. .29f 




Sept. .27$ 


May, .29$ 


May, .32| 


Oats No. 2. 


Oats No. 2. 


Oats No. 2. 


Oats No. 2. 


Jan. .16-jj- 


May, .17£ 


July, .15| 


Oct. .191- 


May, .19f 


July, .18| 


Sept. .15* 


Dec. .19$ 




Sept. .18f 


May, .18$ 


May, ,22f 


Mess Pork. 


Mess Pork. 


Mess Pork. 


Mess Pork. 


Jan. 7.47* 


May, 8.60 


July, 6.85 


Oct. 8.20 


May, 7.80 


July, 8.67* 


Sept. 7.02* 


Dec. 8.32* 
Jau. 9.17* 


Lard. 


Lard. 


Lard. 


Lard. 


Jan. 3.77* 


May, 4.221 


July, 3.87* 


Oct. 4.50 


May, 3.95 


July, 4.32^ 


Sept. 3.971 


Dec. 4.60 
Jan. 4.72* 


Short Ribs. 


Short Ribs. 


Short Ribs. 


Short Ribs. 


Jan. 3.75 


May, 4.65 


July, 3.65 


Oct. 4.95 


May, 3.95 


July, 4.671 


Sept. 3.771 


Dec. 4.80 
Jan. 4.77* 



Under the quotations of January 2, we find that 
wheat purchased on that date for January delivery 
is worth only 80 cents per bushel, while wheat pur- 



198 VALUE AND DISTRIBUTION. 

chased on the same date for May delivery is worth 
831 cents per bushel. Corn purchased in January 
for January delivery is worth only 23 i cents, while 
corn purchased on the same date for July delivery 
is worth 261 cents, etc. In other words, in direct 
opposition to the contention that " present goods are, 
as a rule, worth more than future goods," we find 
that the quotations for future delivery are here in 
excess of the quotations for present delivery in every 
instance save those of wheat and short ribs in the 
October list. 

105. These Exceptions are not fatal to the Ex- 
change Theory of Interest. — Primarily, we have here 
a case of what Bohm-Bawerk has styled " Substitu- 
tionary Utility." With our price-list in mind, let us 
take the case of a grain speculator. From the best 
information he can get he concludes that the price of 
wheat in the coming May will be eighty cents. This, 
despite the fact that its present value is only seventy 
cents. Under these circumstances he decides to buy 
wheat now and sell it next May, when, as he hopes, 
the price will have advanced to eighty cents. 

The question arises, What price will he now pay 
for wheat to be delivered to him or his assigns in May 
next ? We answer, that he will pay, and will only 
pay the price of wheat for present delivery, or seventy 
cents plus the cost of carrying said wheat over to that 
future date. More than this he will not pay, since 
he can insure the future delivery by buying it now 
and storing it until May comes around. In other 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 199 

words, the present value of wheat for a May delivery- 
is a substitutionary value, made up of the price of 
wheat for present delivery plus the cost of carrying 
that wheat until the date of the future delivery. 

Such a price-list is, of course, fatal to the general 
contention that present goods are, as a rule, worth 
more than future goods. Again, if this proposition 
is, as Bohm-Bawerk declares, the centre and kernel 
of the Exchange Theory of Interest, the above price- 
list would seem seriously to invalidate that theory. 
As a matter of fact, the theory stands, despite any 
such list, because that theory does not depend upon 
the establishing of the superiority of the present 
goods as a universal or even as a general proposition. 

For while it frequently happens that " the relations 
of supply and demand in the future will be essentially 
more unfavorable than in the present," yet it hap- 
pens even more frequently that this condition is re- 
versed, in which case, of course, present goods will be 
more highly valued than future goods. Now, all that 
is necessary for a theory of interest is that this last 
condition shall be realized with sufficient frequency 
to furnish profitable employment for the available 
supply of capital in increasing the future supply of 
these present goods. As the supply of capital finds 
very positive limitations in the abstinence endured 
by the marginal saver, it is manifest that interest 
may arise, though the cases in which future goods are 
worth more than present goods are of frequent occur- 
rence in our economic experience. 



200 VALUE AND DISTRIBUTION. 

II ABSTINENCE IN THE EXCHANGE THEORY OF INTEREST. 

In the review of the Exchange Theory of Interest 
it was stated that, according to Bohm-Bawerk, there 
are three influences that tend to make present goods 
worth more than future goods. These are : difference 
in provision, underestimate of the future, and the 
technical superiority of present goods. In the re- 
view of the Abstinence Theory it was shown how 
strenuously Bohm-Bawerk had insisted upon the 
elimination of abstinence as a factor in the deter- 
mination of interest ; this, too, on the ground that 
" high interest" is often got where the sacrifice of 
abstinence is very trifling." * 

106. Interest measured by Marginal Abstinence. — 
In reply to this last contention it was urged that 
here, as elsewhere, it is the marginal that is the de- 
terminant, — in the case under consideration, the ab- 
stinence or disutility endured by the marginal saver 
or capitalist. Nor does any elaborate argument seem 
necessary to show that, despite his formal repudiation 
of abstinence, Bohm-Bawerk has in reality taken 
cognizance of it in the first two of the above-named 
factors that tend to make present goods more highly 
valued than future goods. 

107. Abstinence recognized in the Exchange 
Theory. — (a) Difference in Provision. — With re- 
gard to the first factor, it is manifest that the supply 



* Capital and Interest, p. 297. 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 201 

of goods is increased by capitalistic methods of pro- 
duction. The adoption of these roundabout or more 
productive methods is again dependent upon the sup- 
ply of capital, and this in last resort upon the ab- 
stinence of the marginal saver. Or to put it in a 
different way, — if the supply of present goods was 
practically unlimited no disutility or abstinence 
would be involved in the postponement of the con- 
sumption of a part of such goods. In other words, 
it is because the supply of present goods is, for many 
people, very inadequate that abstinence from con- 
sumption is a disutility which men will not endure 
without the expectation of a greater return in the 
future. 

(b) Underestimate of the Future. — Again, as 
Bohm-Bawerk has clearly shown, the effect of the 
second factor, " underestimate of the future," is 
cumulative with the first. The discounting; of the 
future good has the same effect as increasing the 
" difference in provision." In other words, the re- 
ward of abstinence is discounted by our underesti- 
mate of the future. From this it follows that the 
abstinence or disutility which the marginal saver will 
endure, in the hope of securing that reward, must 
suffer a like diminution. As a result, the process of 
saving ceases earlier, the supply of capital decreases, 
the more productive methods are abandoned, and in 
last resort the supply of present goods is decreased. 
This process is continued until the difference in 
value between present and future goods is again 



202 VALUE AND DISTRIBUTION. 

equated to the abstinence or disutility endured by 
the marginal saver. * 

And so, despite Bohm-Bawerk's practical repudia- 
tion of abstinence in the earlier part of his work 
and his failure to take any formal cognizance of it 
in the final statement of his theory of interest, yet, 
as a matter of fact, he actually includes it in that 
statement, though under other and more cumber- 
some terms. That some recognition of the part 
played by abstinence is necessary to any complete 
solution of the interest problem will be made clear 
in the next chapter. 

III. IS THE TECHNICAL SUPERIORITY OF PRESENT GOODS A 
NECESSARY CONDITION OF INTEREST? 

108. Technical Superiority an Increase in Quan- 
tity of Product. — According to Bohm-Bawerk, the 
third and last factor which tends to make present 
goods worth more than future goods is the " technical 
superiority of present goods." 

* In one instance, though only in a foot-note, Bohm-Bawerk 
recognizes that he is here dealing with the disutility of saving 
(abstinence). In this note he writes : " Indirectly this effect 
will be strengthened by the fact that, through the under- 
valuation of the future utility, men will refrain from pro- 
viding for the future so amply as they otherwise would have 
done. In other words, this underestimate acts to the preju- 
dice of saving and accumulation of wealth and still further 
reduces the number of persons who have to throw an accumu- 
lated surplus of present goods on the market." ("Positive 
Theory of Capital," p. 259.) 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 203 

Just what is meant by this is revealed in the fol- 
lowing passage : " It is an elementary fact of experi- 
ence that methods of production which take time are 
more productive. That is to say, given the same 
quantity of productive instruments, the lengthier the 
productive method employed the greater the quantity 
of products that can be obtained." 

From this it is clear that the technical superiority 
which this writer has in mind is an increase in the 
quantity of products, and the task that he has set for 
himself is to show that this increase in the quantity 
of products necessarily results in an increase in value. 
In other words, he devotes the entire chapter on the 
technical superiority of present goods to an endeavor 
to supply that ellipsis between the increase in product 
and the increase in value which proved so fatal to 
the earlier productivity theories. (" Positive Theory 
of Capital," p. 260.) Again, he writes: " The state- 
ment of how the productivity of capital works into 
and together with the other two grounds of the 
higher valuation of present goods I consider one of 
the most difficult points in the theory of interest, 
and, at the same time, the one which decides the 
fate of that theory." (Page 277, foot-note.) 

109. Defects in Bohm-Bawerk's Reasoning. — As 
against this I would urge, first, that the technical 
superiority of present goods is not an " independent 
cause of the higher valuation of present goods ;" 
secondly, that the technical superiority of present 
goods does not necessarily result in an increase in 



204 VALUE AND DISTRIBUTION. 

value, and thirdly, that the technical superiority of 
present goods is not an essential condition of interest. 

(a) Technical Superiority not an Indepen- 
dent Cause of Value. — Bohm-Bawerk writes : 
" Thus we get as a result of our digression the assured 
conviction of two things : first, that the productive 
superiority of present goods assures them not only 
a surplus in product, but a surplus in value; and, 
second, that in this superiority we have to deal with 
a third cause of the surplus value, and one that is 
independent of any of the two already mentioned."* 

In criticising this statement some inquiry is first 
necessary as to the sense in which Bohm-Bawerk 
employs the term " independent." He writes : f 
" About the first two factors we know already : their 
effects are cumulative. ... It is essentially differ- 
ent with the co-operation of the third factor. True, 
it also tends to strengthen the action of the other fac- 
tors, but it does so alternatively, not cumulatively." 
That is to say, that factor which confers the greater 
advantage on present goods always stands out from 
the other as the active agent. Say, for example, 
that the first factor (the circumstances of provision), 
together with the second factor (that of perspective), 
taken cumulatively, would give present goods an ad- 
vantage of thirty per cent., while the factor of pro- 
ductivity would give an advantage of twenty-five per 

* Positive Theory of Capital, p. 270. 
f Ibid., p. 273. 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 205 

cent., we should not get a total advantage of fifty- 
five per cent., but of thirty per cent., the advantage 
being based on the stronger factor." 

From this it is manifest that the writer regards 
the third factor as acting in the same direction as the 
other two. Again, though he holds that the three 
factors are not cumulative in their effect, he never- 
theless maintains that they may vary in their effect, 
that one may be greater than the other ; in which 
case, under the law of alternate values, the value is 
determined by the greater of the two. In other 
words, he seems to regard the third factor, the tech- 
nical superiority of present goods, not as one of two 
or more variables that enter into the determination, 
but as an entirely independent and self-sufficient 
cause of the higher valuation of present goods, and 
so of interest. 

Now, it is clear that the multiplication of com- 
modities, if operating in entire independence of the 
other two factors, can at most only give rise to an in- 
crease in utility and not to an increase in value. 
The indefinite general concept of utility is only con- 
verted into the more definite concept of marginal 
utility or value by the limitation of the supply, and 
this is accomplished by abstinence or by the operation 
of the first two factors. In other words, we cannot 
have a valuation of thirty set by disutility, and a 
valuation of twenty-five set by utility, for we are 
here dealing with normal value or with the case in 
which marginal utility and marginal disutility must 



206 VALUE AND DISTRIBUTION. 

coincide. How, then, can it be said that either factor 
is an independent cause of the higher valuation of 
present goods, and so of interest ?" 

(b) The Technical Superiority of Present 
Goods does not necessarily result in an In- 
crease in Value. — Since we here have to deal with 
a proposition which Bohm-Bawerk holds to be the 
" chief pillar" of his theory of interest, it will be 
well to let him state his own case somewhat in detail. 
He writes : " Suppose that, in the year 1888, we 
have command of a definite quantity of productive in- 
struments, say, thirty days of labor, we may, in terms 
of the above proposition, assume something like the 
following. The month's labor, employed in methods 
that give a return immediately, and are, therefore, 
very unremunerative, will yield only 100 units of 
product ; employed in a one year's process, it yields 
200 units, but, of course, yields them only for the 
year 1889 ; employed in a two years' process it yields 
280 units — for the year 1890 — and so on in increasing 
progression : say, 350 units for 1891, 400 for 1892, 
440 for 1893, 470 for 1894, and 500 for 1895." 

If the month's labor is not employed in production 
until 1889 it would start in the same way with 100 
units of product in 1889 and would increase in each 
succeeding year, but would only reach 470 units of 
product in 1895. In the same way a month's labor 
which is not employed in production until 1890 
would start with 100 units of product in 1890, but 
would only reach 440 units in 1895. This is ex- 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 207 

hibited by Bohm-Bawerk in the following tabulated 
statement : 



A MONTH'S LABOK OF THE YEAE. 



1888 
1889 
1890 
1891 
1892 
1893 
1894 
1895 



1888. 


1889. 


1890. 


1891. 


100 








200 


100 






280 


200 


100 




350 


280 


200 


100 


400 


350 


280 


200 


440 


400 


350 


280 


470 


440 


400 


350 


500 


470 


440 


400 



PM 



From this it is manifest that if we take any par- 
ticular year, say 1892, the month's labor which was 
first employed in 1888, or in a five years' process, will 
yield 400 units of product, while that which was first 
employed in 1889, or in a four years' process, only 
yields 350 units. And so, whatever year is taken, 
the longer production period yields the greater quan- 
tity of product. Bohm-Bawerk then proceeds to ask : 

" But is it superior also in the height of its mar- 
ginal utility and value ? Certainly it is. For if, in 
every conceivable department of wants for the sup- 
ply of which we may or shall employ it, it puts more 
means of satisfaction at our disposal, it must have a 
greater importance for our well-being. Of course, I 
am aware that the greater amount need not always 
have the greater value ; — a bushel of corn in a year 



208 VALUE AND DISTRIBUTION. 

of famine may be worth more than two bushels after 
a rich harvest ; a silver shilling before the discovery 
of America was worth more than five shillings are 
now. But for one and the same person, at one and 
the same point of time, the greater amount has always 
the greater value ; whatever may be the absolute 
value of the bushel or the shilling, this much is cer- 
tain, that, for me, two shillings or two bushels which 
I have to-day are worth more than one shilling or 
one bushel which I have to-day. And in our com- 
parison of the value of a present and a future amount 
of productive instruments the case is exactly similar. 
Possibly the 470 units of product which may be 
made from a month's labor in 1889 for the year 
1895, are worth less than the 350 units which may 
be got from the same for the year 1892, and the lat- 
ter, notwithstanding their numbers, may be the most 
valuable product which can be made out of a month 
of 1889 in general. In any case the 400 units which 
a man can gain by a month's labor of the year 1888 for 
the year 1892 are still more valuable, and therefore 
the superiority of the earlier (present) amount of pro- 
ductive instruments — here and everywhere, however 
the illustration may be varied — remains confirmed." 
Now, while we here have an explicit recognition of 
the fact that " the greater amount need not always 
have the greater value," and this because of the de- 
cline in marginal utility, yet I would ask, has not 
Bohm-Bawerk ignored this fact in his final con- 
clusion? For when he insists that the 400 units 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 209 

which result from a five years' productive period 
must have a greater value than the 350 units which 
result from a four years' period, he clearly assumes 
that the marginal utility or value per unit remains 
unchanged despite the increase in the supply of the 
commodity from 350 to 400 units. 

If the 50 units is but an insignificant part of the 
total supply, it may well happen that the addition of 
this amount will not appreciably affect the marginal 
utility or value per unit of the commodity. In this 
case the total value of the 400 units would, of course, 
be greater than the total value of the 350 units. But 
if the increase in quantity of product is a consider- 
able part of the total supply of the commodity its 
marginal utility may suffer a rapid decline. In that 
event it might readily happen that the total value of 
the 400 units will be less than the total value of the 
350 units would have been if we had contented our- 
selves with the shorter production period. Under 
such circumstances one who controls a large share 
of the total product might find it profitable to shorten 
the period of production, for the same reason that the 
Dutch East India Company destroyed a portion of 
their crops in years of over-abundant harvests. A 
glance at Fig 10, which was employed to illustrate 
this oft-quoted experience, will reveal the conditions 
under which an increase in product will result in 
an increase in total value. For since total value is 
the quantity of product multiplied by the marginal 
utility or value per unit, it follows that this total 

14 



210 



VALUE AND DISTRIBUTION. 



Fig. 10. 




value can only increase when the increase in product 
is greater than the decrease in marginal utility. In 

other words, Bohm- 
Bawerk has not only 
failed to show that the 
increase in quantity of 
product, which is the 
outcome of a longer 
period of production, 
will necessarily result 
in an increase in total 
value, but from the 
very nature of the case 
it is impossible to show 
any such necessary connection between an increase 
in quantity and an increase in value. But while 
their association may not be of universal or even of 
general occurrence, yet it may be realized with suffi- 
cient frequency to afford profitable employment for 
the available supply of capital. And I take it that 
here again this is all that is necessary for the pur- 
poses of Bohm-Bawerk's Theory of Interest. 

(c) Technical Superiority of Present Goods 
is not an Essential Condition of Interest. — 
That the technical superiority of present goods in 
the sense of an increase in the quantity of product 
is not an essential condition of interest may be shown 
by reference to that good old example by which, as 
Bohm-Bawerk has said, " many an interest theory 
has been tested and found false." We refer, of 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 211 

course, to the case of wine, whose value increases 
with its age. Here, as is manifest, the increase in 
value is entirely independent of any change in quan- 
tity or volume. The same is true of ice cut in 
January for use in July, and indeed of a host of 
other commodities. The case of ice is noted by 
Bohm-Bawerk, but is dismissed as exceptional and 
unimportant. Yet, rightly understood, this case will 
be found far more typical of the phenomena of in- 
terest than those manufactured goods in which there 
is a multiplication of commodities. As already 
noted, this writer accents the increase in commodi- 
ties far too strongly. He thus loses sight of the 
fact that from the stand-point of the Marginal Utility 
Theory of Value, the typical cases of interest are those 
in which this phenomenon is entirely independent 
of any physical change in the commodity, or those 
in which the increase in value is determined from 
the side of the consumer rather than from the side 
of the producer, — by the growing demand rather 
than by the growing supply. For, while it is in a 
measure true that the greater value of ice in summer 
is due to the fact that its supply is more limited than 
in winter, it is equally true that this increase in value 
is in part due to the increase in demand that arises 
with the return of warm weather. In other words, 
the phenomenon of interest, or of surplus value, is 
here realized in its simplest form. The commodity 
is physically complete in quantity and kind, yet it 
still continues to grow in value, and that, too, as a 



212 VALUE AND DISTRIBUTION. 

function of time. This manifestly holds true for 
all goods that are produced in anticipation of a 
market, for it is practically impossible amid the 
complications of modern industry to so time the 
process of production that the commodity will reach 
physical completion at the very instant that the con- 
sumer is ready to take possession of it. Unless this 
perfect adjustment in time is realized, the good must 
wait on the demand before it can develop its full value. 

But, after all, the single case of wine is sufficient 
for the purposes of our argument. For it may fairly 
be urged that the exception which was sufficient to 
overthrow one theory of interest must be as strong 
against every other theory that fails to account for it 
in a satisfactory way. If the third factor, defined by 
Bohm-Bawerk as the multiplication of commodities, is 
a necessary condition of interest, then it is in order for 
the advocates of the Exploitation Theory of Interest 
to rule out the surplus value of aging wine as having 
no connection with the phenomenon of interest. 

The confusion in this part of Bohm-Bawerk's 
argument seems to be caused, as we have already 
said, by the undue accent which he has thrown upon 
those cases where the phenomenon of interest is asso- 
ciated with an increase in the quantity of commodi- 
ties. This has led to the tacit assumption that an 
objective increase of commodities is a necessary con- 
dition of interest. And yet it must be remembered 
that no one has insisted more strongly than the 
Austrians that economists have primarily to deal not 



CRITICISM OF THE EXCHANGE THEORY OF INTEREST. 213 

witli commodities but with utilities, and that these 
utilities only become matters of economic interest 
when there is some limitation of their supply. 

Nor is this defect in Bohm-Bawerk's treatment of 
the subject a mere question of accent, for he totally 
ignores those instances or conditions under which this 
surplus of value may arise without an increase in the 
quantity ol product. In other words, the technical 
superiority of present goods is always restricted to an 
increase in quantity of product, and his entire dis- 
cussion of this part of the subject is confined to an 
attempt to show that this increase in quantity will 
necessarily result in an increase in value. Again, 
this increase in quantity of product, or the technical 
superiority of present goods, is nowhere recognized 
as a frequent but unessential condition of interest. 
On the contrary, he declares that it is the "chief 
pillar" of his theory of interest (pages 264 and 270), 
just as he elsewhere declared that the superior value 
of jDresent goods is the very "centre and kernel" of 
that theory. In conclusion, I can only hope that the 
limitations of this criticism of the Exchange Theory 
of Interest will be clearly recognized. For despite 
what has here been written, I believe that the essen- 
tial elements of the Exchange Theory will stand im- 
pregnable against all assaults. In other words, it 
actually, if not formally, recognizes the three essential 
elements, productivity, time, and abstinence, and 
rightly holds that the phenomenon of interest in- 
volves an exchange of present for future goods. 



CHAPTER IX. 

THE MARGINAL PRODUCTIVITY THEORY OP 
INTEREST. 

We have seen that Bohm-Bawerk prefaced his 
discussion of the " Exchange Theory of Interest" 
by an attempt to determine just what is meant by 
capital. It will therefore be necessary to compare 
his concept of capital with the concepts developed 
by Clark in his discussion of the Marginal Produc- 
tivity Theory of Interest. 

I. COMPETING CONCEPTS OF CAPITAL. 

110. Capital as a Sum of Concrete Commodities. 
— Bohm-Bawerk, as we have seen, defines capital 
as the "sum of intermediate products." In other 
words, the only concept of capital that he has in mind 
is a sum of concrete commodities. It will now be 
shown that there is still another concept of capital, 
and one which, for the purposes of the theory of in- 
terest, is far more important than that to which he 
has called attention. 

111. Capital as a Mobile, Homogeneous Fund. — 
We get some hint of this second concept as far back 
as Calvin's attempt to justify interest on the ground 
that the entrepreneur employs his borrowed capital 
in ways that yield him a larger return than the in- 
terest which he pays for the use of capital. That is 

214 



THE MARGINAL PRODUCTIVITY THEORY OF INTEREST. 215 

to say, the return secured by particular concrete 
forms of capital may be more than the general, average, 
or level return secured by capital throughout the 
whole range of industry. Any monopoly advantage 
that may exist attaches to the ownership of the con- 
crete intermediate products, and so is secured by their 
owners ; the capitalist being constrained to content 
himself with a non-monopoly return, or with a nor- 
mal rate of interest. This is the rate paid for capital 
conceived as a sort of abstract, mobile, homogeneous 
fund capable of embodiment in any form the entre- 
preneur may desire. This is interest per se. 

Frequent statements may be found in economic 
literature which, if followed to their legitimate con- 
clusion, would undoubtedly lead to this concept of 
capital, but it was not until J. B. Clark published his 
" Law of Wages and Interest" * that this thought was 
elaborated and given clear and definite statement. 
His contention is that it is not materials, machines, 
or buildings that the capitalist loans, but a sort of 
general draft upon society, — value in a readily con- 
vertible form ; a sort of abstract fund which the en- 
trepreneur converts into concrete intermediate prod- 
ucts. Then, too, the embodiment of this abstract 
fund in various concrete forms is not a permanent 
transaction. Materials are used up; machines and 
plants wear out ; but while doing so money is earned 
with which we can buy others. In this way, while 

* Annals of American Academy, July, 1890. 



216 VALUE AND DISTRIBUTION. 

the concrete intermediate products are continuously 
changing, the abstract fund remains intact. 

Again, the money earned while the machines, etc., 
are wearing out may be invested in an entirely dif- 
ferent kind of machine or in an entirely different 
industry. While an anvil cannot be transmuted 
into a loom or a forge into a woollen-mill, yet the 
capital originally invested in anvil and forge may 
be invested in loom and woollen-mill if the money 
earned by anvil and forge is sufficient to pay for 
loom and mill. It is in this way that capital may 
be taken out of the less productive and invested in 
the more productive industries. In other words, the 
capital which we here have in mind is not only an 
abstract but, as well, a mobile, homogeneous fund. 

II. RATE OF INTEREST FIXED BY MARGINAL PRODUCTIVITY. 

This brings us to the question, What do we mean 
by the general, average, or level rate of interest ? 
Von Thiinen long since declared that interest is de- 
termined by the return secured by " the last dose of 
capital" whose employment is economically permis- 
sible. This thesis is developed at considerable length 
by Clark, who writes as follows : " If population be 
fixed and pure capital increases, what must the new 
capital do ?" To this he makes answer : " It must 
take less and less productive forms of outward embodi- 
ment." Here, as elsewhere, value is determined by 
marginal utility. The entrepreneur will not pay 
more for one portion of the mobile, homogeneous fund 



THE MARGINAL PRODUCTIVITY THEORY OF INTEREST. 217 

which he borrows from the capitalist than he can earn 
with the last portion. If the capitalist should insist 
on a greater return the entrepreneur would decrease 
the amount he would borrow, and a portion of the 
capitalist's funds would remain unemployed. " This 
means, in current scientific phrase, that the final 
utility of capital is reduced, and, by the most familiar 
of commercial principles, this fact reduces the mar- 
ket value of the whole supply. General interest is 
gauged by the earnings of the instrument that the 
employer or initiator procures with the final increment 
of borrowed capital.'''' 

112. Clark on the Mobility of Capital. — " How this 
commercial principle, that price is governed by final 
utility, applies to capital we may see by a simple 
illustration. There might seem to be a difficulty in 
the case, arising from the fact that capital in its con- 
crete forms is not homogeneous. The utility of the 
last increment of wheat clearly fixes the price of the 
entire crop ; but the last bushel of wheat does not 
set the price of the last pound of wool. Why, then, 
should the utility of capital in the shape of paint- 
brushes set the loan rate of capital in the shape of 
ploughs ? It does this, as we shall quickly see; and if 
we are willing to look a little more closely we shall 
see not only that the utility of the pure capital in 
the paint-brushes governs the price of the capital in 
the ploughs, but that the actual earnings of the less 
necessary implements, as they are used by employers, 
determine the earnings of the more necessary ones. 



218 VALUE AND DISTRIBUTION. 

It is as though ploughs, spades, wagons, engines, oxen, 
paint-brushes, etc., were as homogeneous as kernels 
of wheat. We shall quickly see how this comes to 
be true. 

" Let there be an isolated community living on 
an island of the sea with a due variety of natural 
products, and let a dozen families furnish the work- 
ing force. Give to them now their first instalment 
of tools ; it will take the shape of the instrument 
that is most needed, let us say an axe ! If there be 
a capitalist in the case, — we care not for the present 
who or where he is, — he can get for his loan approxi- 
mately what the axe adds to the product created by 
the community. Let him furnish now a second in- 
stalment of pure capital, or productive wealth, con- 
vertible into any form ; can he get as much for it as 
for the first? He could do so if the second unit 
were as productive as the first, but it is not so. It 
must take the shape of an implement that is less 
sorely needed than was the axe, let us say a spade. 
It is the product that the spade adds to the gains of 
the community that gauges the reward of the capital 
embodied in it; and that product is less than was 
that of the axe. 

" Why, however, may there not be two rates of in- 
terest, one for each of the units of pure capital ? Is 
not the axe as necessary as ever? Why may not 
the owner of the capital that is embodied in it get as 
much as ever ? Why may he not demand and get 
all that the employer and the community back of 



THE MARGINAL PRODUCTIVITY THEORY OF INTEREST. 219 

the employer are willing to pay for having trees 
felled and wood split ? Must a highly useful imple- 
ment be degraded by the presence of a less useful 
one, and submit to be rated lower by the reason of 
its company ? It must submit to exactly that. Its 
importance to the community is diminished by the 
presence of its inferior fellow-implement. If the 
axe were lost altogether, its work would now be car- 
ried on notwithstanding its absence. There was a 
time when the loss of an axe meant the cessation of 
wood-cutting ; now it no longer means this ; wood- 
cutting goes on, though something else stops. 

" Tools themselves are not interchangeable ; one 
cannot do the work of the other. The units of pure 
capital in them are interchangeable ; one may do the 
work of the other, and all are, therefore, equally 
important. We may easily test this principle. The 
product of anything may be treated by supposing 
that it is annihilated and ascertaining how much the 
output of the working force is thereby diminished. 
As the second unit of pure capital is about to em- 
body itself in the spade, let us destroy the axe. 
Will the community get on without this implement ? 
If so, the loss is measured by the full amount of its 
productive power ; but they will not do so ; they will 
at once restore the axe. The unit of capital that 
was about to embody itself in a spade will now take 
the form of the more necessary implement, and the 
actual loss that the community suffers is that of the 
spade. By taking away the axe we have actually 



220 VALUE AND DISTRIBUTION. 

forced the men to get on without a spade, and the 
loss inflicted on them is measured by the product of 
the spade. 

" Let there be a third increment of capital, taking 
the shape of a saw. The work of all three will go 
on together, but the real importance of the units of 
capital in them will in each case be gauged by the 
efficiency of the saw. Remove at any time one of 
the more-needed tools, and the community will re- 
place it by foregoing the one that stands in the 
series as last and least necessary. Interest is paid 
not for concrete things, but for pure capital; and that 
passes freely from form to form, and is everywhere 
equally rewarded. It is as homogeneous in the ab- 
stract as wheat, and the price of it is as ainenable as 
is the price of wheat to the law of final utility." * 

It hardly seems necessary to add anything to this 
very able discussion except the following brief sum- 
mary. It is here made clear, first, that there are two 
concepts of capital, — one as a sum of concrete instru- 
ments, and the other as the abstract, mobile, homo- 
geneous fund, which finds embodiment in these con- 
crete forms. Secondly, it has here been shown that 
interest is the return secured by capital under this 
latter conception. Thirdly, the rate of interest is de- 
termined by the marginal productivity of this mobile, 
homogeneous fund of capital, or by its product in the 

* Law of Wages and Interest, pp. 5-13, Annals of Ameri- 
can Academy, July, 1890. 



THE MARGINAL PRODUCTIVITY THEORY OF INTEREST, 221 

least productive industry in which its employment is 
economically permissible. 

A theory that thus limits the determination of 
interest to the very definite concept of the marginal 
productivity of capital, is, of course, a great advance 
upon the earlier and more indefinite productivity 
theory. But even yet we are far from the solution 
of the interest problem ; for though it is true that 
interest may be measured in terms of the marginal 
productivity of capital, the question still remains, 
What fixes this margin ? What determines the sup- 
ply of capital ? This problem will be taken up in 
the next chapter. 



CHAPTER X. 

THE NORMAL- VALUE THEORY OP INTEREST. 

In - the review of the various theories of interest 
that have from time to time been proposed, it was 
seen that the advocates of the Use Theory clearly- 
recognized the important part played by the time ele- 
ment, while the Productivity and Abstinence Theories 
severally accented the importance of productivity and 
abstinence, or of utility and disutility. In the Ex- 
change Theory there is a very marked advance upon 
all previous attempts to solve this problem, in that it 
clearly and formally recognizes that time and prod- 
uctivity are both essential conditions of interest ; it 
also takes cognizance of disutility or abstinence under 
the headings of " Difference in Provision" and " Un- 
derestimate of the Future." It is true that in Bohm- 
Bawerk's development of this theory there is little to 
suggest that he was at all conscious of the fact that 
he had here reintroduced that abstinence which he 
so uncompromisingly repudiates in other parts of his 
work, but that he has so reintroduced it I hope I have 
succeeded in showing. Any logical inconsistency 
that may have resulted from his admission of absti- 
nence or disutility as an essential element in the in- 
terest problem is more than balanced by the greater 
completeness and truth of the theory of interest which 

he has proposed. 
222 



THE NORMAL- VALUE THEORY OF INTEREST. 223 

I. INTEREST A PROBLEM IN NORMAL VALUE, 

At the close of the preceding chapter it was urged 
that even the very definite concept of marginal prod- 
uctivity fails satisfactorily to explain the interest 
problem. It was also seen that we are here dealing 
with a mobile, homogeneous fund. From this it is 
an easy step to the further conclusion that we are 
here dealing with the conditions of free competition 
or with normal value, hence marginal utility and 
marginal disutility will here coincide and mutually 
limit each other. Given the productivity of capital, 
the marginal point is fixed by the supply of capital, 
and this in the case of the mobile, homogeneous fund 
of capital is limited by marginal disutility or absti- 
nence. Hence it may be maintained that marginal 
productivity and marginal abstinence are of equal 
importance in determining the rate of interest. 

113. The Source of Bohm-Bawerk's Error. — Let 
us now ask, How has it happened that Bohm- 
Bawerk has failed to recognize this most important 
truth ? For one is seldom contented with convict- 
ing so acute a thinker of serious error unless it is 
seen just how he was betrayed into it. In the first 
place, I would urge that the concept of capital as an 
abstract, mobile, homogeneous fund is not one that lies 
on the face of things. Again, it must be remembered 
that Bohm-Bawerk approaches the question from the 
stand-point of the Marginal Utility Theory of Value, 
and that in the establishing of this theory he has 



224 VALUE AND DISTRIBUTION. 

been at some pains to prove that scarcity values are 
the rule rather than the exception. With this fact 
clearly established, so far as concrete commodities 
are concerned, he passed over to the interest prob- 
lem, and, having denned capital as a sum of concrete 
intermediate products, he could not well avoid the 
conclusion that interest is the return secured by capi- 
tal as a sum of concrete commodities. From this it 
seemed to follow that a theory of interest which only 
accounted for the earnings of freely reproducible 
goods, an exceedingly limited share of all concrete 
commodities, must be a totally inadequate theory of 
interest. And so we found that Bohm-Bawerk's most 
serious objection to Senior's Abstinence Theory was 
that " he has made his interest theory part of a theory 
of value in which he explains the value of goods by 
their cost," hence " it can only be in the most favor- 
able circumstances a partial interest theory. It might 
explain those profits that are made in the production 
of goods produced at will, but logically every other 
kind of profit would escape it altogether." * 

The obvious answer to all this is, that the only 
form of profit to which we can apply the term in- 
terest is such as arises under free competition. 

Bohm-Bawerk here follows the defective analysis 
or want of analysis of the older economists. He 
confounds the surplus which arises from the mo- 
nopoly inherent in concrete forms with the normal 

* Capital and Interest, p. 286. 



THE NORMAL-VALUE THEORY OF INTEREST. 225 

surplus, which is the earning of capital as a mobile, 
homogeneous fund. If the familiar terms profit and 
interest are retained, then there is no escape from con- 
fusion except by restricting the former to the monop- 
oly and the latter to the normal surplus. The retain- 
ing of these every-day terms by giving them a more 
definite and restricted meaning is, of course, attended 
with some disadvantages, nor is their retention a mat- 
ter of serious concern. The all-important consid- 
eration is the recognition of the essential difference 
that exists among the three forms of surplus. On 
the one side rent or the price-determined surplus, 
on the other profit and interest or the price-deter- 
mining surpluses. These last being distinguished 
from each other by the fact that one is a monopoly 
and the other a normal surplus. From this it fol- 
lows that in the determination of the normal surplus 
or interest utility and disutility coincide : hence no 
theory of interest can be complete which does not 
recognize the part played by abstinence in limiting 
the supply of capital and so co-operating with produc- 
tivity in the determination of the rate of interest. 

114. Bohm-Bawerk's Confused Recognition of the 
Part played by Abstinence. — In fairness to Bohm- 
Bawerk it should be noted that he does occasionally 
recognize that abstinence plays a part in the deter- 
mination of interest. He sees that the supply of 
productive goods is limited, and that it can all find 
employment in industries that will yield a surplus. 
This, of course, raises the further question, What 

15 



226 VALUE AND DISTRIBUTION. 

limits the supply of capital? Some answer to this 
question may be found in " Capital and Interest," 
page 276, where, after quoting Lasalle's brilliant phi- 
lippic against the Abstinence Theory, Bohm-Bawerk 
continues, " This brilliant attack notwithstanding, I 
believe there is a core of truth in Senior's doctrine. 
It cannot be denied that the making as well as the 
preservation of every capital does demand an absti- 
nence from or postponement of the gratification of 
the moment; and it appears to me to admit of as 
little doubt that this postponement is considered in, 
and enhances the value of those products that, under 
capitalist production, cannot be obtained without more 
or less of such postponement. If, e.g., two commodi- 
ties have required for their production exactly the 
same amount of labor, say one hundred days, and 
that one commodity is ready for use immediately that 
the labor is finished, while the other — say new wine 
— must lie for a year, experience certainly shows 
that the commodity which becomes ready for use 
later will stand higher in price than that which is 
ready at once, by something like the amount of 
interest on the capital expended." Yet, strangely 
enough, Bohm-Bawerk concludes, and in this same 
connection, that the Abstinence Theory fails because 
" high interest is often got where the sacrifice of ab- 
stinence is very trifling." This, too, despite the fact 
that in his discussion of value he has so strenuously 
insisted that the marginal is the determinant. 

Again, he writes : " In making this calculation it 



THE N0RMA3>YALUE THEORY OF INTEREST. 227 

will not be overlooked that the institution of interest 
has its manifold uses ; particularly as the prospect of 
interest induces saving and accumulation of capital, 
and this, by making possible the adoption of more 
fruitful methods of production, becomes the cause of 
a more abundant provision for the whole people. In 
this connection the much used and much abused ex- 
pression 'Reward of Abstinence' is in its proper 
place. The existence of interest cannot be theoret- 
ically explained by it ; one cannot hope in using it 
to say anything about the essential nature of in- 
terest ; every one knows how interest is simply pock- 
eted without any abstinence that deserves record." 
Here again his recognition of abstinence is confounded 
by his failure to recognize that it is marginal absti- 
nence that enters into the determination of interest. 
This confused recognition of the part played by ab- 
stinence results in its practical repudiation in the 
earlier part of Bohm-Bawerk's discussion. He also 
fails to take any formal cognizance of it in the final 
statement of his theory of interest, though, as we 
have shown, he actually includes it in that state- 
ment, though under other and more cumbersome 
terms. That this recognition of the part played by 
abstinence is necessary to a complete solution of the 
interest problem is, of course, manifest the moment 
we recognize the fact that we are here dealing with 
normal value, or that it is capital as a mobile, homo- 
geneous fund that earns the surplus value to which 
we have given the name interest. While the Aus- 



228 VALUE AND DISTRIBUTION. 

trian economists are undoubtedly right in their con- 
tention that among concrete commodities scarcity 
values are the rule, yet when we come to capital as 
the earner of interest per se, we clearly recognize that 
we here have the conditions of ideal free competi- 
tion, or those conditions in which, to use Marshall's 
phrase, marginal utility and marginal disutility " co- 
operate like the two blades of a pair of shears." 

115. Statement of the Normal- Value Theory. — 
From this it follows that what we have to show in 
any theory of interest is not that the multiplication 
of commodities will necessarily result in an increase 
of values, but, first, that the roundabout methods 
give rise to an increase of utilities ; and, secondly, 
that the supply of these utilities is relatively so lim- 
ited that the increase in utilities is coincident with an 
increase in value, or, as Bohm-Bawerk has himself 
written, " It is because the stock of present goods is 
always so low that the conjuncture for their exchange 
against future goods is always favorable." (" Positive 
Theory of Capital and Interest," p. 359.) 

Again, he writes : " Now it can be shown, and with 
this we come to the goal of our long inquiry, that 
the supply of present goods must be numerically less 
than the demand. The supply even in the richest 
nation is limited by the amount of the people's wealth 
at the moment. The demand, on the other hand, is 
practically infinite ; it continues at least so long as the 
return to production continues to increase with the 
extension of the production process, and that is a 



THE NORMAL-VALUE THEORY OF INTEREST. 229 

limit which, in the richest nation, lies far beyond the 
amount of wealth possessed at the moment." (Page 
332.) 

Here, then, we have the ultimate facts in regard to 
interest. For while capitalistic methods eventually 
result in an increase of the supply of present goods, 
and so tend to decrease the value of such goods, yet 
human desires continue to outrun the supply of pres- 
ent goods, and as a result of this present goods are 
more highly valued than future goods. Again, the 
adoption of roundabout methods depends upon the 
increasing of the supply of capital. If this supply 
should be indefinitely increased, capital would be 
forced to find employment in less and less productive 
industries until it reaches those in which no surplus 
value can be realized. In other words, the supply 
of present goods would become so abundant that men 
would cease to value them more highly than present 
goods. Capital, however, is not thus indefinitely in- 
creased, and this for the reason that such increase 
involves the exchange by the marginal saver of a 
present for a future good. Hence, so long as man's 
desires outrun his powers of production, or so long as 
present goods are more highly valued than future 
goods, an exchange of the former for the latter in- 
volves a sacrifice or disutility. It is this that tends to 
restrain the increase in the supply of capital, and so 
the adoption of that capitalistic method of production 
whose ultimate effect is to decrease the value of pres- 
ent goods. 



230 VALUE AND DISTRIBUTION. 

It is therefore not at all necessary to confound the 
discussion by an elaborate attempt to show that the 
increase in the quantity of commodity which results 
from the adoption of the roundabout methods will* 
effect an increase in value. The explanation is, in 
simple, that man's desires so outrun his powers of pro- 
duction that, despite the increase in quantity of com- 
modity due to the adoption of capitalistic methods, 
the supply of present goods is for many people so 
restricted that they give a higher valuation to these 
than to future goods. 

If we wish to get back of this and inquire how the 
supply of capital and so the ultimate supply of pres- 
ent goods is thus limited, we can only answer that 
this increase in the supply of present goods depends 
in the first instance on an increase in the supply of 
capital. Again, this increase in the supply of capi- 
tal involves an exchange of present for future goods, 
or the disutility of abstinence. Hence, in last resort, 
the productivity of capital and so the ultimate sup- 
ply of present goods is restricted by the abstinence or 
disutility endured by the marginal saver or capitalist. 
That is to say, interest is a case of normal value ; it 
may, therefore, be measured either in terms of mar- 
ginal productivity or of marginal abstinence, but it 
can only be determined by the joint action of these 
two factors. 

It is manifest that this does not conflict in any 
way with Bohm-Bawerk's thesis that interest results 
from an exchange of present for future goods. The 



THE NORMAL- VALUE THEORY OF INTEREST. 231 

theory here proposed is, after all, but an extension of 
Bohm-Bawerk's analysis, and may be styled either 
the Exchange Theory or the Normal- Value Theory 
of Interest. But since the failure to recognize the 
normal character of the phenomena has led to some 
confusion, it has seemed well to adopt the name The 
Normal- Value Theory of Interest. 



BOOK IV.-WAGES. 



CHAPTER I. 

THE WAGES FUND DOCTRINE. 

The doctrine that there is a fund the exact 
amount of which must be expended in the payment 
of wages, and hence that average wages may be ob- 
tained by dividing this sum by the total number 
of laborers, is usually credited to McCulloch. As a 
matter of fact, this doctrine found unqualified state- 
ment as early as the publication of " The Wealth of 
Nations." (Book I. Chap. VII.) It will therefore be 
in order to begin a review of this doctrine with Adam 
Smith's contribution to the subject. 

I. THE EARLIER ADVOCATES OF THE THEORY. 

116. Adam Smith writes : " The demand for those 
who live by wages, it is evident, cannot increase but 
in proportion to the increase of the funds which are 
destined for the payment of wages." Again, " The 
demand for those who live by wages, therefore, neces- 
sarily increases with the increase of the revenue and 
stock of every country, and cannot possibly increase 
without it. The increase in revenue and stock is the 
increase of national wealth. The demand for those 

232 



THE WAGES FUND DOCTRINE. 233 

who live by wages, therefore, naturally increases with 
increase of national wealth, and cannot possibly in- 
crease without it." He also writes : " The diminution 
of the capital stock of society or of the funds des- 
tined for the maintenance of labor as it lowers the 
wages of labor, so it raises the profits of stock." 
(Book I. Chap. VIII.)* 

In these " funds which are destined for the pay- 
ment of wages," or the " funds destined for the 
maintenance of labor," we undoubtedly have that 
"Wages Fund Doctrine" which, as we shall see 
later on, has provoked so much just criticism. 

117. James Mill writes : " Universally, then, we 
may affirm, other things remaining the same, that 
if the ratio which capital and population bear to one 
another remains the same, wages will remain the 
same ; if the ratio which capital bears to population 
increases, wages will rise ; if the ratio which popu- 
lation bears to capital increases, wages will fall." 
(" Political Economy," p. 44.) 

118. Ricardo accepts this Doctrine, but carries 
the Argument a Step farther.— In the first place, 
Ricardo clearly recognizes that the doctrine applies 
to real and not to nominal wages. Speaking of a 
general rise of prices, and so of the price of corn as 

* The recognition of this reciprocal relation between wages 
and profits is usually regarded as originating with Eicardo. 
But nowhere does the latter give more explicit statement to 
this proposition than is found in the above lines from Adam 
Smith. 



234 VALUE AND DISTRIBUTION. 

a result of an influx of the precious metals, or of 
the abuse of banking privileges, he says, " It leaves 
undisturbed, too, the number of laborers as well as 
the demand for them ; for there will be neither an 
increase nor a diminution of capital. The quantity 
of the necessaries to be allotted to the laborer de- 
pends on the comparative demand and supply of 
necessaries, with the comparative demand and sup- 
ply of labor, money being only the medium in which 
the quantity is expressed ; and as neither of these is 
altered, the real demand of the laborer is not altered." 
Again, Kicardo follows the wages fund doctrine 
to its legitimate conclusion, and holds that wages 
are only indirectly affected by the efficiency or prod- 
uctivity of labor. In a letter to Malthus, written 
in 1815, he says, " If instead of four, ten measures 
of cloth could be produced by a day's labor, no rise 
would take place in wages, no greater portion of 
corn, cloth, or cotton would be given to the laborer, 
unless a portion of the increased produce were em- 
ployed as capital, and then the rise in wages would 
be in proportion to the increased demand for labor, 
and not at all in proportion to the increase in quan- 
tity of commodities produced." It is against this 
necessary conclusion of the wages fund doctrine that 
much of the later and best criticism of this doctrine 
has been directed.* 

* We have here availed ourselves of the excellent review 
of the literature of the subject in Taussig's " "Wages and 
Capital." 



THE "WAGES FUND DOCTRINE. 235 

In so brief a sketch we may safely ignore the 
writers who defended this doctrine in the interval 
between Bicardo and J. S. Mill ; for, while it is true 
that McCulloch is frequently spoken of as the author 
of the doctrine, yet the preceding quotations from 
Smith, Bicardo, and the elder Mill will show how 
utterly unfounded is this claim. 

II. THE LATER ADVOCATES AND CRITICS OF THE THEORY. 

119. J. S. Mill's Statement of the Theory. — J. S. 
Mill writes : " Wages, then, depend mainly upon the 
demand and supply of labor ; or, as it is often ex- 
pressed, on the proportion between population and 
capital. By population is here meant the number 
only of the laboring class, or, rather, of those who 
work for hire; and by capital, only circulating capital, 
and not even the whole of that, but the part which 
is expended in the direct purchase of labor. . . . 

" With these limitations of the terms, wages not 
only depend on the relative amount of capital and 
population, but cannot, under the rule of competition, 
be affected by anything else. Wages (meaning, of 
course, the general rate) cannot rise but by an in- 
crease of the aggregate funds employed in hiring 
laborers or a diminution in the number of compet- 
itors for hire ; nor fall, except either by a diminu- 
tion of the funds devoted to paying labor or by an 
increase in the number of laborers to be paid." 
(Book II. Chap. XI.) 

It should be noted that in this last paragraph Mill 



236 VALUE AND DISTRIBUTION. 

bases the wages fund doctrine upon the general law 
of supply and demand; wages "under the rule of 
competition" cannot be affected by anything but the 
relative amount of capital and population, the former 
being the demand for and the latter the supply of 
this commodity. 

(a) Mill's Contention that Trades Unions 
cannot increase Wages. — It will be necessary to 
quote one more passage from Mill if we are to under- 
stand the very interesting controversy that took place 
between this writer and W. T. Thornton. After ex- 
pressing sympathy with labor organizations Mill con- 
tinues : " They might doubtless succeed in diminish- 
ing the hours of labor and obtaining the same wages 
for less work, but if they aimed at obtaining actually 
higher wages than the rate fixed by demand and 
supply, the rate which distributed the whole circu- 
lating capital of the country among the entire work- 
ing population, this could only be accomplished by 
keeping a part of their number permanently out of 
employment." * In other words, it follows as a neces- 
sary conclusion from the premises of the Wages Fund 
Doctrine that Trades Unions are powerless to im- 
prove the condition of the laborer by raising his 
wages. It was this necessary conclusion that pro- 
voked Thornton's able and incisive criticism.f 

With this criticism and Mill's practical acceptance 

* Book V. Chap. X. Sec. Y. 

f Wm. Thomas Thornton " On Labor." 



THE WAGES FUND DOCTRINE. 237 

of Thornton's conclusions we have now to deal. It 
is sometimes said that Mill, in the latter part of his 
life, had become so imbued with the ideas of the 
socialist writers that his defence of the old ortho- 
dox economics had been greatly weakened. This is 
supposed to explain his hasty abandonment of the 
Wages Fund Doctrine as a result of Thornton's at- 
tack. In the present review of this most interesting 
movement in economic theory we hope to show how 
utterly hopeless a case Mill had to defend, and how 
able a champion there was on the other side of the 
question. 

120. Longe's Criticism of Mill. — This writer (Fran- 
cis D. Longe, barrister) published in 1866 " A Refu- 
tation of the Wages Fund Doctrine" three years 
before Thornton published his book " On Labor, 
etc." This sudden interest in the Wages Fund Doc- 
trine was undoubtedly due to that growing activity 
of the trades unions which resulted in the great com- 
mission of 1867. It was, of course, clearly seen that 
if the Wages Fund Doctrine was sound, then the at- 
tempts of the unions to raise wages was worse than 
useless. It was undoubtedly this necessary conclu- 
sion that provoked the vehement attacks upon the 
doctrine which appeared at this time. 

Longe held that the Wages Fund Doctrine fails, 
first, because, as a matter of fact, there is no distinct 
fund which is definitely set apart for the payment of 
wages, and, secondly, because the doctrine rests upon 
a wrong notion of the part played by supply and de- 



238 VALUE AND DISTRIBUTION. 

mand in the determination of price. But as our space 
is limited, and as these contentions find much clearer 
statement in Thornton's book, it will be well to re- 
strict ourselves to a review of that writer's contri- 
bution. 

121. Thornton's Theory of Price and Wages. — 
Thornton's attack was not, as is frequently stated, 
primarily directed against Mill's occasional lapse 
from real to nominal wages, for Thornton himself 
was not always clear upon this point. The thesis 
which Thornton sought to establish was that laborers, 
by combining, may exercise a monopoly influence and 
so raise the rate of wages. In his development of 
this thesis he goes at once to the root of the whole 
question and denies Mill's fundamental contention that 
"the rate of wages or the price of any other commodity 
is necessarily fixed by demand and supply." 

While Thornton is not altogether happy in his use 
of terms, there can be no doubt about the soundness 
of his main argument. Stated very briefly and in 
modern terms, this argument is found to be practi- 
cally the same as that developed in the fifth chapter 
of the present volume. The utility of a good to the 
consumer and producer, or the demand and supply, 
to use the older terms, only establish limits within 
which the price may vary. The point within these 
limits at which the price is actually fixed depends 
upon the relative monopoly strength of buyer and 
seller, and so is incapable of reduction under an exact 
law. In developing this thesis Thornton shows that 



THE WAGES FUND DOCTKENE. 239 

the relation between the supply and demand may 
vary without a corresponding variation in the price 
of the commodity. 

Thornton's statement of the case is as follows: 
" We have in the first place to observe that there are 
two opposite extremes, — one above which the price 
of a commodity cannot rise, the other below which it 
cannot fall. The upper of these limits is marked by 
the utility, real or supposed, of the commodity to the 
consumer ; the lower, its utility to the dealer." (Page 
58.) That the price will be greater or less, according 
as the seller or the buyer is in the best position to 
take advantage of the other's necessities, is clearly 
indicated in the following passage : " Sometimes it 
is the buyer or employer who, although greatly in 
need of labor, yet needing it less than the laborer 
needs employment, can better afford to wait, and can 
thereby artificially (or artfully, if you prefer) dimin- 
ish or, more properly speaking, conceal demand. 
Sometimes it is the laborer who can best afford to 
wait, and who, in like manner, has artifices at his 
command by which he can lessen supply, etc." 
Again Thornton writes : " The relations between sup- 
ply and demand might vary without being accom- 
panied or followed by variations in price, while, on 
the other hand, price might vary without any con- 
comitant or antecedent variations of supply and de- 
mand." (Page 57.) The marginal concepts also find 
some possible recognition in passages like the follow- 
ing : " Competition does, indeed, always depend upon 



240 VALUE AND DISTRIBUTION. 

the estimate of the probable supply and demand 
formed by those dealers who rate lowest the probable 
proportion of demand to supply." (Page 64.) 

In the development of his thesis Thornton shows 
by concrete illustrations that his law of price is true 
for the market price of general commodities, and 
likewise for wages or the price of labor. " Speaking 
generally, we may no doubt say, with perfect accu- 
racy, that the price of labor is determined by the 
same general cause as the price of any other salable 
commodity. In no case whatever is it immediately 
dependent upon supply and demand." (Page 66.) 

In brief, then, Thornton held that in the case of 
labor, as of every other commodity, price is not fixed 
in an exact way by supply and demand, or, to use 
more modern terms, by its marginal utility to seller 
and buyer. These only establish limits within which 
the price may vary, the price being finally deter- 
mined at some point within these limits by the rela- 
tive monopoly strength of seller and buyer. It follows 
from this, and we here have the thesis that Thornton 
set out to establish, that laborers by combining or 
by increasing their monopoly strength may increase 
their wages. If this is true, then there can be no, 
fixed wages fund the exact amount of which must be 
expended in wages. 

"Nine-tenths of the confusion and obscurity," 
writes Thornton, "in which the doctrine .of price has 
hitherto been involved has arisen from searching 
after the unsearchable, from seeking for some invari- 



THE WAGES FUND DOCTRINE. 241 

able rule for inevitable variations, from straining after 
precision where to be precise is necessarily to be wrong. 
Supply and demand are commonly spoken of as if 
they together formed some nicely fitting, well-balanced, 
self-adjusting piece of machinery, whose component 
parts could not alter their mutual relations without 
evolving, as the product of every change, a price 
exactly corresponding with that particular change. 
Price, and more especially the price of labor, is 
scarcely ever mentioned without provoking a refer- 
ence to the ' inexorable,' the ' immutable,' the ' eter- 
nal' laws by which it is governed; to laws which, 
according to my friend Professor Fawcett, ' are as 
certain in their operation as those which control 
physical nature.' It is no small gain to have dis- 
covered that no such despotic laws do or can exist ; 
that, inasmuch as the sole function of scientific law 
is to predict the invariable recurrence of the same 
effect from the same causes, and as there can be no 
invariability where — as in the case of price — one of 
the most efficient causes is that ever-changing cha- 
meleon, human character or disposition, price cannot 
possibly be subjected to law." (Page 65.) 

122. The Importance of Thornton's Theory of 
Price not generally recognized. — So far as I know, 
the great importance of Thornton's discussion of the 
general theory of price has never been fully recog- 
nized. Even so eminent an economist as F. W. 
Taussig, writing as late as 1896, has failed to see 
the fundamental point made by Thornton. Taussig 

1G 



242 VALUE AND DISTRIBUTION. 

writes : " We need not follow the intricacies of his 
[Thornton's] reasoning about supposed cases of horses 
at one 'price and another, of corn and gloves, Dutch 
auctions, and so on. With the application of the 
principle of marginal utility this whole phase of 
economic theory has become simplified. Mill's equa- 
tion of demand and supply is stated in better terms, 
and with fuller consideration of all the elements in- 
volved in the now familiar proposition that price 
depends on marginal utility. Mill himself, in admit- 
ting the justice of some of Thornton's criticisms, 
pointed out that one important condition had not 
been mentioned in the Political Economy, which yet 
must be present if the equation of demand and sup- 
ply is to fix price at a definite point. Quantity de- 
manded must vary with price continuously. The 
same condition, it is clear, must be present if the 
modern version of the law of demand and supply is 
to bring a determinate answer. If marginal utility 
is to fix price without a range of possible variation, 
each added increment of the article offered must have 
a less utility than the portion preceding it. These 
are now commonplaces ; they make Thornton's dis- 
cussion antiquated and leave Mill's significant only 
as showing that, on topics which he had stopped to 
think over with care, he reasoned with severe ac- 
curacy." (The italics are mine.) ("Wages and Cap- 
ital, p. 251.) 

When Taussig dismisses " the cases of horses at 
one price and another" with such scant courtesy, and 



THE WAGES FUND DOCTRINE. 243 

when he says that "this whole phase of economic 
theory" finds much simpler statement in terms of 
marginal utility, he seems to have missed the essen- 
tial point in Thornton's contention. For if Thorn- 
ton had been familiar with the modern doctrine of 
marginal utility he would have insisted that mar- 
ginal utility does not determine price except in the 
rare case of normal value. 

Again, are we told that Mill, in his reply to Thorn- 
ton, pointed out the fact that the theory of price set 
forth in the " Political Economy" is only true under 
the assumption that " Quantity demanded must vary 
with price continuously." From this Taussig con- 
cludes that " on topics which he [Mill] had stopped 
to think over with care he reasoned with severe ac- 
curacy." Now, I would ask, is this entirely fair to 
Thornton ? for this latter writer has repeatedly called 
attention to this assumption, as in the above itali- 
cized passages. Indeed, his whole argument against 
the then accepted theory of price was based upon the 
contention that this condition is not generally real- 
ized in the markets of the world. Mill believed that 
this assumption was generally realized in the price 
of commodities, for he held that " scarcity goods are 
rather conceivable than actually existing." Thorn- 
ton, on the other hand, took the more modern view 
and recognized the general prevalence of scarcity 
goods, and is thus led to conclude that the quantity 
demanded does not vary with the price continuously. 

And so while Mill thought that the old theory 



244 VALUE AND DISTRIBUTION. 

might be pieced out by the discovery of some " sup- 
plementary law," Thornton held that " price cannot 
possibly be subjected to law," and this for the reason 
that in last resort general prices depend upon the 
relative monopoly strength of buyer and seller. In 
view of this it must, I think, be admitted that it is 
Thornton who reasoned with severe accuracy, and 
that his reasoning has made antiquated not only 
Mill's discussion, but much of the discussion of the 
Austrian economists as well. 

It is more than probable that the present writer 
would likewise have missed the point raised by 
Thornton if he had not worked out this same thesis, 
in Part I. of the present volume, some years before 
his reading of Thornton " On Labor." Thornton, 
however, approaches the question inductively, while 
in my discussion the accent is thrown upon the de- 
ductive argument, for the contention that " demand 
varies with price continuously" is found to rest in 
last resort upon the assumption of absolutely free 
competition on the side of the consumers. An as- 
sumption that has no greater warrant than that 
which lies back of Ricardian economics, to wit : 
that competition is absolutely free on the side of the 
producers. 

123. One Source of Confusion in Thornton's Dis- 
cussion. — This writer clearly recognizes, as we have 
seen, that supply and demand, or marginal utility to 
buyer and marginal utility to seller, only establish 
limits within which the price may vary. He also rec- 



THE WAGES FUND DOCTRINE. 245 

ognizes that the final determination depends upon 
the relative monopoly strength of buyer and seller, 
for he has written : " Sometimes it is the buyer or 
employer who, although greatly in need of labor, 
yet needing it less than the laborer needs employ- 
ment, can better afford to wait, and can thereby arti- 
ficially (or artfully if you prefer) diminish or, more 
properly speaking, conceal demand. Sometimes it is 
the laborer who can best afford to wait, and who in 
like manner has artifices at his command by which 
he can lessen supply," etc. Moreover, Thornton 
does not regard this as peculiar to the wages of 
labor, but holds that it is true of the market prices 
of general commodities. 

Elsewhere, however, Thornton tells us that supply 
and demand dot no " affect price, except indirectly, 
and by their influence on competition, which, and 
which alone, is the immediate arbiter of price." (Page 
64.) Again, he writes, " Wherever competition is 
permitted to act without restriction, he will find that 
the price may vary exceedingly without the smallest 
variation in the relations of supply and demand ; 
and he will also find that there cannot be the smallest 
variation in the price without a previous and corre- 
sponding variation in competition, which, therefore, 
he will, in the cases examined, be constrained to 
recognize as the price's determining cause." (Page 
69.) This contention that competition is the ultimate 
determining cause of price certainly seems to conflict 
with the first contention, that price depends upon the 



246 VALUE AND DISTRIBUTION". 

artificial, artful, or monopoly control of the supply of 
and demand for a commodity. 

This confusion in his thought is brought out even 
more distinctly in a foot-note on page 69 : " This, 
in speaking of tangible commodities, seems to me a 
more accurate as well as a simpler way of stating 
the case than to say that the competition of dealers 
makes price fall, and that competition of customers 
makes it rise. What the latter competition seems 
to me really to do is to show the dealers that a 
higher price than they previously supposed is attain- 
able, and to induce them consequently to relax their 
own competition so as to obtain it." 

Thornton here follows the earlier economists and 
apprehends very clearly and strongly the competition 
among producers or sellers, and that this results 
in a declining price. When, however, he turns to 
the phenomenon of advancing price his contention 
that competition is the final determinant of price 
compels him to recognize competition among buyers 
or consumers as the cause of this advance. But 
the inherited tendency to associate competition with 
falling prices asserted itself, and he concludes that 
competition among buyers does not directly affect 
prices, but only shows that a higher price may be 
obtained, and this induces the sellers " to relax their 
own competition so as to obtain it." Or he here 
contends that in the case of advancing prices it is 
not competition but the relaxing of competition that 
determines price. In other words, that it is the 



THE WAGES FUND D0CTEINE. 247 

artificial, artful, or monopoly control of the supply- 
by the sellers that is here the ultimate determinant 
of price. The explanation of this difficulty is readily 
found. We usually think of monopoly as absolutely 
controlling the supply. As a matter of fact, neither 
competition nor monopoly is absolute on either side, 
hence the phenomena may be described either in 
degrees of competition or in degrees of monopoly, 
just as we might say either that we have so many 
degrees of heat or so many degrees of cold. We 
tend, however, to associate competition with the con- 
cept of free competition or with normal price, and 
to apply the term monopoly to every departure from 
normal conditions. It may, therefore, save some 
confusion if we abandon Thornton's contention that 
competition is the final determinant and say, as I 
have done, that marginal utility and marginal dis- 
utility only fix the limits within which the price 
may vary, and that the point at which the price 
is finally fixed depends upon the relative monopoly 
strength of buyer and seller. 

124. There is no Fund set apart for the Payment 
of Wages. — In a foot-note on pages 84, 85, Thorn- 
ton approaches the question in a less didactic way, 
and, as this is the part of his argument most fre- 
quently referred to, it may be well to reproduce it 
at some length. He writes : 

"What makes mischievous fallacies doubly mis- 
chievous is their incorrigible propensity to propagate 
their species. Only allow them a little time to settle, 



248 VALUE AND DISTRIBUTION. 

and they are sure to swarm like bees. Of course, 
so inveterate a fallacy as the popular theory of sup- 
ply and demand could not fail to have a numerous 
offspring, which may accordingly be seen cropping 
up in a variety of shapes in every direction. Among 
the most unmistakable of its progeny is a certain 
imaginary ' wage fund ;' on the proportion between 
the amount of which, and the quantity of labor in 
the country, the price of labor or rate of wages is 
sometimes declared to depend. On this subject an 
excellent friend of mine, and an excellent economist 
to boot, speaks as follows in a very interesting little 
volume which he has lately published : ' The circu- 
lating capital of a country is its wage fund. Hence, 
if we desire to calculate the average money wages 
received by each laborer, we have simply to divide 
the amount of capital by the number of the labor- 
ing population. It is, therefore, evident that the 
average money wages cannot be increased unless 
either the circulating capital is augmented or the 
number of the laboring population is diminished.' 
(Fawcett's ' Economic Position of the British La- 
borer,' p. 120.) It is due to Professor Fawcett's 
high and deserved reputation to explain that, in 
saying this, he is apparently repeating, without 
much reflection, what has often been said before 
by MacCulloch and others of equal eminence among 
his predecessors. What, however, does his and 
their language mean ? Evidently nothing less than 
this, that there is a certain national fund, the whole 



THE WAGES FUND DOCTEINE. 249 

of which must necessarily be applied (' destined' 
was MacCulloch's favorite word) to the payment 
of wages. But, is there really any such fund ? If 
there be, it can only be an aggregate of smaller 
funds of the same kind possessed by the several 
individuals composing the nation. But has any 
individual any such fund? Is there any specific 
portion of any individual's capital which the owner 
must necessarily expend upon labor? Of course, 
there is a certain amount which every effectual em- 
ployer can afford to spend upon labor, as also there 
is in every instance a certain limit to that amount 
which cannot possibly be expended. But must the 
amount, so limited, which is thus applicable to the 
purchase of labor, be necessarily so applied ? Does 
any farmer or manufacturer or contractor ever say 
to himself, ' I can afford to pay so much for labor ; 
therefore, for the labor I hire, whatever the quantity 
be, I will pay so much' ? Does he not rather say, ' So 
much labor I require, so much is the utmost I can 
afford to pay for it, but I will see for how much less 
than the utmost I can afford to pay I can get all the 
labor I require' ? But if there thus be no wage fund 
which any single employer is bound to distribute 
among laborers, evidently there can be no aggregate 
fund which the whole body of employers is bound 
so to distribute ; evidently, therefore, there can be no 
national wage fund, division of which by the whole 
number of laborers seeking employment will show 
the average rate of wages they will obtain." 



250 VALUE AND DISTRIBUTION. 

125. Mill's Reply to Thornton. — Mill replied to 
Thornton in the Fortnightly Review, May, 1869. 
He there admitted that there are cases where supply 
and demand do not accurately determine price, and 
that there is, therefore, some supplementary law yet 
to be developed. He writes : " Whoever can teach 
us the supplementary law makes a valuable addition 
to the scientific theory of the subject." But in this 
very admission Mill betrays his utter failure to ap- 
preciate the point that Thornton had made, — namely, 
that the conditions fixing the price at some point 
within the limits established by supply and demand 
are so indeterminate as to be incapable of reduc- 
tion under any exact law. (See Section 109 of 
present volume.) 

After admitting that in a few exceptional cases of 
general commodities Thornton's contention holds 
good, Mill turns to the question of wages and in- 
quires whether Thornton's contention holds good in 
this connection. Mill writes: "It will, of course, be 
said that these speculations are idle, for labor is not 
in that barely possible excepted case. Supply and 
demand do not entirely govern the price obtained for 
labor. The demand for labor consists of the whole 
circulating capital of the country, including what is 
paid in wages for unproductive labor. The supply is 
the whole laboring population. If the supply is in 
excess of what the capital can at present employ, 
wages must fall. If the laborers are all employed 
and there is surplus capital still unused, wages will 



THE WAGES FUND DOCTRINE. 251 

rise. This series of deduction is generally received 
as incontrovertible. They are found, I presume, in 
every systematic treatise on Political Economy, my 
own certainly included. I must plead guilty to 
having, along with the world in general, accepted 
the theory without the qualifications and limitations 
necessary to make it admissible. 

" The theory rests on what may be called the doc- 
trine of the wages fund. There is supposed to be, 
at any given instant, a sum of wealth which is un- 
conditionally devoted to the payment of the wages 
of labor. This sum is not regarded as unalterable, 
for it is augmented by saving and increases with the 
progress of wealth ; but it is reasoned upon as being 
at any given moment a predetermined amount. 
More than that amount it is assumed that the wages- 
receiving class cannot possibly divide among them ; 
that amount, and no less, they cannot but obtain. So 
that, the sum to be divided being fixed, the wages of 
each depends solely upon the devisor, — the number of 
participants. In this doctrine it is by implication 
affirmed that the demand for labor not only increases 
with the cheapness, but increases in exact proportion 
to it ; the same aggregate sum being paid for labor 
whatever its price may be." (Page 515.) Mill then 
asks, " But is there such a thing as a wages fund, in 
the sense here implied ? Exists there any fixed 
amount which, and neither more nor less than which, 
is destined to be expended in wages ?" (Page 516.) 
His answer to this question is in the negative. 



252 VALUE AND DISTRIBUTION. 

" There is no law of nature making it inherently 
impossible for wages to rise to the point of absorbing 
not only the fund which he (employer) had intended 
to devote to carrying on his business, but the whole 
of what he allows for his private expenses, beyond 
the necessaries of life. The real limit to the rise is 
the practical consideration, how much would ruin 
him or drive him to abandon the business ; not the 
inexorable limit of the wages fund." (Page 516.) 

It is interesting to note that Mill here goes down 
before an argument which Thornton regarded as so 
unimportant that he committed it to a foot-note. 
The theory of price to which Thornton devoted much 
space, and which was his most important contribution 
to economic theory, Mill dismisses as true of a few 
barely possible cases. The reason for this failure to 
recognize the importance of Thornton's contention is 
found in the fact that Mill continued to think of 
scarcity goods as rather conceivable than actually 
existing. 

126. Wages are affected by the Productivity of 
Labor. — Again, it might be urged that the wages 
fund doctrine leads us inevitably to the conclusion 
reached by Ricardo, — namely, that wages are only in- 
directly affected by the efficiency or productivity of 
labor. Now, since in the case of all other commodi- 
ties the price tends to vary with the efficiency or 
utility of the commodity, a theory of wages which 
contravenes this experience is at least open to serious 
suspicion. Again, when we remember that capital 



THE WAGES FUND DOCTRINE. 253 

may be invested either in machines or in the wages of 
laborers, it becomes manifest that the amount sever- 
ally devoted to these competing interests will depend 
on their relative efficiency ; where wages are higher 
relatively to the efficiency of labor, there will be a 
corresponding increase in the capitalistic methods of 
production. In other words, more capital will be 
invested in machines and less in men. If, however, 
the efficiency of labor is increased, more capital will 
be determined to labor, and wages will rise.* Nor do 
we successfully avoid this criticism by confining our 
wages fund to the capital dedicated to the payment 
of labor, for this fund is, manifestly, indeterminate, 
since it, too, must vary with the relative efficiency of 
men and machines. The best review of this phase of 
the question will be found in " A Critique of Wage 
Theories," by Dr. Stuart Wood, which was published 
in the " Annals of the American Academy." 

127. Cairnes's Attempt to rehabilitate the Doc- 
trine. — Cairnes, who sought to rehabilitate the wages 
fund doctrine, added but little to this part of the 
discussion. He admitted Thornton's contention that 
within certain limits the laborers might by combina- 
tion increase their wages. He, however, urged that 

* In keeping with this, the high wages in the United States 
have compelled a more general use of machinery than pre- 
vails elsewhere ; but the fact that capitalistic methods are 
more generally adopted in the United States may indicate 
that the difference in wages exceeds the difference between 
the efficiency of labor here and in Europe. 



254 VALUE AND DISTRIBUTION. 

if their demands trenched upon the normal rate of 
profits the inducement to save would be lessened, 
capital would decrease, and, in the end, this would 
react upon the rate of wages. In other words, he 
held, and rightly, that there is some necessary rela- 
tion between the supply of capital and the supply of 
labor, or that there is a sense in which it is true that 
wages can only increase with the increase of avail- 
able capital. On page 271 it will be shown just 
what this necessary relation is, and we shall then 
learn that this relation is much too complicated to 
allow us to get the rate of market wages by a simple 
process of division. Again, it will be seen that it 
is only true for normal wages, and so is quite aside 
from the problem which the " wages fund doctrine" 
was supposed to solve. For, from Adam Smith to 
Taussig, this doctrine has been held to apply to mar- 
ket wages. The latter, for instance, writes : " The 
narrower question of ' market' wages, which is the 
essence of the wages fund doctrine, etc." (Note, p. 
255, " Wages and Capital.") 

128. The Element of Truth in the Wages Fund 
Doctrine. — The marvellous vitality of this doctrine, 
the persistence with which the ablest economists have 
clung to it, is due, in large part, to the soul of truth 
which it undoubtedly contains, — namely, that, under 
normal conditions, there is a necessary relation be- 
tween the supply of capital and the earnings of 
labor. If profits fall below the normal rate, accumu- 
lation ceases and laborers are forced to work with less 



THE WAGES FUND DOCTRINE. 255 

efficient instruments. But it must be remembered 
that this is only true under normal conditions. The 
wages fund doctrine, therefore, has confounded con- 
fusion by attempting to impose a law upon market 
prices that can only be true for normal prices. 

129. The Source of the Confusion. — It may be 
well, before leaving this part of the discussion, to 
inquire just how or why economists were betrayed 
into this error. In answer, it may fairly be said, 
that this " wages fund doctrine" was but part of the 
general attempt to reduce economic phenomena to 
more simple and manageable terms, which character- 
ized the economics of the earlier part of this century. 
This was done by declaring that scarcity values are 
the excej)tions and free competition the rule in the 
every-day industrial world. The simplicity and order 
that this introduced amid the previous chaos marked 
a great advance in economic theory, and gave to 
Ricardian economics its clearness and vitality. Nor 
should it be forgotten that, in the latter part of the last 
and the beginning of the present century, the trend of 
events seemed to be in the direction of free compe- 
tition. But in the last half of the present century 
this tendency has been reversed, thus compelling us 
to recognize the fact that scarcity values are the rule 
rather than the exception. 



CHAPTER II. 

THE RESIDUAL CLAIMANT THEORY OP 'WAGES. 

This theory may be briefly summed up as follows : 
Kent, interest, and profits are determined by fixed 
definite laws, while wages are a more or less indeter- 
minate share of the social product. In other words, 
the receiver of wages is in much the same position as 
the residual claimant to an estate, — he must wait 
until all specific bequests have been paid, and then 
receives any balance that remains. This gives us a 
scheme of distribution that is much like that which 
was developed in Ricardian economics. There is, 
however, this important difference : in the one case 
the residual claimant is the receiver of wages, while 
in the Ricardian scheme the residual claimant is the 
receiver of Ricardian profits. 

130. Profits the Residual Share according to the 
Earlier Economists. — In so far as the earlier econo- 
mists troubled themselves about the problem of dis- 
tribution, they held that the social product was divided 
into rent, wages, and profit, — the latter share being 
frequently confounded with interest. We have seen, 
in the preceding chapter, that Adam Smith and 
Ricardo both held that wages and profit vary in- 
versely. This would seem to have been based on the 
contention that rent being fixed by a definite law, the 

256 



THE RESIDUAL CLAIMANT THEORY OF WAGES. 257 

balance was divided between wages and profit ; hence 
if one was increased the other must be diminished. 

While this reciprocal relation between wages and 
profit is frequently insisted upon by Ricardo, yet 
here and there in his writings we find a very serious 
modification of this scheme of distribution. For, ac- 
cording to Malthus, normal wages are definitely fixed 
by the cost of producing labor, and according to the 
" Wages Fund Doctrine" market wages are definitely 
determined by dividing total capital by total number 
of laborers, while rent is more or less definitely de- 
termined by the Law of Rent. Both rent and wages 
being thus determined by definite laws, it follows 
that profit is the balance left after deducting the 
other two shares. In other words, he who secures 
this third share is in the position of a residual legatee. 
Here, in a very simple form, we have a scheme of 
distribution which, consciously or unconsciously, lies 
back of the whole Ricardian system of economics. 
Indeed, it was not until Cairnes attempted to reha- 
bilitate the wages fund doctrine that we find a more 
or less conscious abandoning of this scheme of dis- 
tribution. 

131. Oairnes's Statement of the Residual Claim- 
ant Theory of Wages. — Cairnes, as we have seen, 
admitted Thornton's claim that wages might vary 
w T ithin certain limits. He, however, urged that if 
wages were so increased as to cut in on the normal 
rate of profits, saving would be discouraged, capital 
would decrease, men would be compelled to labor 

17 



258 VALUE AND DISTRIBUTION. 

with less efficient tools, and, hence, the wages of labor 
would of necessity decline. Now, while there was 
undoubtedly much truth in this contention, it was 
clearly a repudiation of that system of distribution 
which had been accepted without question for welk 
nigh half a century. For, since profits are here de- 
termined by a law of normal value, one might urge 
that the receiver of wages is then in the position of 
the residual claimant. 

132. Walker's Residual Claimant Theory of 
Wages. — The late President Walker, who was the 
first clearly to enunciate the " Residual Claimant 
Theory of Wages," reached much the same conclu- 
sion as Cairnes, though by a somewhat different route. 
He first distinguishes between the function of the capi- 
talist and the function of the entrepreneur. Having 
shown that entrepreneurs of superior skill receive a 
differential surplus, like owners of land of superior 
fertility, he gives to this differential surplus, when 
secured by the entrepreneur, the name profit. This, 
of course, gives us four shares in distribution, — rent 
of land ; interest, or the normal surplus which Cairnes 
had in mind ; profit, as defined by Walker ; and wages. 
The first three of these shares being determined by 
definite laws, it seems to follow that the laborer is in 
the position of the residual claimant. 

In the 1888 edition of his " Political Economy" 
Walker writes : " It has not been by accident, or 
whim, or from any notion respecting the compara- 
tive dignity of the several claimants to the product 



THE RESIDUAL CLAIMANT THEORY OF WAGES. 259 

of industry, that rent, interest, and j>rofits have been 
discussed before wages." 

" This order has been followed for a positive rea- 
son, which is that, in the theory of distribution here 
proposed, wages equal the product of industry minus 
the three parts already determined in their nature 
and amount. In this view the laboring class receive 
all they help to produce, subject to deduction on the 
three several accounts mentioned." (Page 248.) 

" These three shares being cut off," the product of 
industry, the whole remaining body of wealth, daily 
or annually created, is the property of the laboring 
class; their wages, or the remuneration of their 
services." (Page 250.) 

" I have spoken of the laborer as the residual 
claimant upon the products of industry. That view 
of wages being new, even the phrase in which I have 
embodied it has been excepted to. Since the first 
edition of this treatise was published certain writers 
have declared that there is no more reason for apply- 
ing the term residual to wages than for applying it 
to any other share of the products of industry ; that 
each share, in turn, comprises all which the other 
shares do not include." (Page 252.) 

" The criticism of these writers is not just. It is 
competent to them to controvert the view of the 
origin and measure of business profits presented in 
the last chapter; and, in expressing their dissent 
therefrom, they will, of course, deny that wages con- 
stitute the residual share of the product. But no 



260 VALUE AND DISTRIBUTION. 

one can properly make question that, if this view of 
business profits be accepted, as correctly setting forth, 
in the large way, the facts of industry, not only is 
what is manifestly meant by the phrases residual 
claimant, residual share, completely true, but also 
that those phrases themselves are perfectly accurate 
in the expression of that meaning." (Page 253.) 

" Upon the theory of profits which has been ex- 
pounded, the remuneration of labor, wages, is strictly 
the residual share of the product of industry ; residual 
in this sense, that it is enhanced by every cause, 
whatever that may be, which increases the product 
of industry without giving to any one of the other 
three parties to production a claim to an increased 
remuneration, under the operation of the principle 
already stated ; residual in the sense that, even if 
any one or all of the other parties to production be- 
come so engaged in any given increase of the product 
as to become entitled to an enhanced share in its dis- 
tribution, their shares will remain subject to deter- 
mination by positive reasons, while wages receives 
the benefit of all that is left after the other claimants 
are satisfied." (Page 253.) 

133. Criticism of Walker's Theory. — In attempt- 
ing any criticism of this theory of wages, it should be 
remembered that, like Thornton's effort, it was a pro- 
test against the " Wages Fund Doctrine." Thornton's 
protest, however, was principally directed against a 
Conclusion to which that doctrine inevitably led, — 
namely, that all attempts of labor to improve its 



THE RESIDUAL CLAIMANT THEORY OF WAGES. 261 

condition by combining in Trades Unions, etc., are 
utterly futile. Thornton refuted this contention by 
showing that labor, like any other commodity, may 
have a scarcity or monopoly value. Now, it is in- 
teresting to note that one of the first criticisms of 
Walker's " Residual Claimant Theory" was to the 
effect that, like the " Wages Fund Doctrine," it leads 
to the conclusion that no combination of labor can 
help the condition of the laboring class. For, if the 
laborer is a residual claimant, then it must be true of 
him as of the residual legatee of an estate, that he is 
powerless to increase or decrease his share in the dis- 
tribution. The other claimants having their shares 
fixed by definite laws, the laborer can only wait and 
accept what is left ; an amount that may be either 
greater or less than was originally contemplated by 
the testator. 

Walker replied to this by referring to his other 
writings, in which he had persistently advocated the 
importance of labor organizations. It was, however, 
open to his critics to urge that if he had followed his 
" Residual Claimant Theory" to its logical conclusion 
he would have seen how inconsistent it was with his 
previously declared position on the subject of trades 
unions, and that he must abandon one or the other 
of these positions. 

Walker also referred, in rebuttal, to the original 
text, in which he developed the " Residual Claimant 
Theory of Wages," and called attention to the fact 
that he had there stated that the laborers would 



262 VALUE AND DISTRIBUTION. 

receive their residual share "unless by their own 
neglect of their interest, or through inequitable laws, 
or social customs having the force of laws," etc. 
(page 251). This, of course, provokes the question, 
Does not this qualification practically negative the 
"Residual Claimant Theory"? If through law or 
custom the laborer is prevented from securing this re- 
sidual share, has not his resemblance to the residual 
legatee of an estate, in any ordinary use of the term, 
practically disappeared ? For, in this event, the la- 
borer, like every other contestant, must exert what- 
ever monopoly power he can control, if he wishes to 
avoid a loss. Again, Walker writes that the laborer 
may lose his advantage by " weak, spasmodic, or un- 
intelligent competition with the employing class." 
(Page 259.) If this is true, does it not follow that the 
laborer's share depends, in last resort, not upon any re- 
sidual claim, but upon his power to have and to hold ? 
Nor was Walker very successful in his reply to 
the further criticism that there is no more reason for 
regarding labor than for regarding capital as the 
residual claimant.* To this he replies, " This is per- 
fectly true provided the laboring classes are placed at 
a disadvantage economically by excess of numbers 
over opportunities for employment, or by a painfully 
slow increase of capital, due either to the severity of 
natural conditions or to social violence or disorder. 



* See John A. Hobson's criticism and Walker's reply in the 
Quarterly Journal of Economics, 1891. 



THE RESIDUAL CLAIMANT THEORY OF WAGES. 263 

In the latter case, it would be the capitalist, not the 
laborer, who would have the ' upper hand on the 
stick.' In fact, however, in all well-ordered com- 
munities, enjoying large natural resources, the ac- 
cumulation of capital tends to outrun the increase 
of population, while the ability of capitalists (not of 
employers) to combine so as to prevent the rate of in- 
terest from falling under the pressure of a rapidly 
increasing supply is conspicuously less than the 
ability of laborers so to combine as to hold up the 
rate of wages. It was simply and solely on account 
of this economic advantage in such communities that 
the mastery of the situation was attributed to the 
laboring class." (Page 422, " Quarterly Journal of 
Economics, 1891.") 

In answer to this it may again be urged, first, 
that when we declare that the laborer gets that which 
he is able to take and strong enough to defend, we 
have practically abandoned the concept of a residual 
claimant ; secondly, on the very pages where Walker 
develops this Residual Claimant Theory of Wages he 
holds that in the case of an increase in the product 
due to the efforts of the laborer, " that increase goes 
to them by purely natural laws, provided only com- 
petition be full and free." In other words, his con- 
tention that the laborers are the residual claimants 
because they have the monopoly advantage of the 
capitalist is stultified by this assumption of free com- 
petition as a necessary condition of their receiving 
the product of their labor. 



264 VALUE AND DISTRIBUTION. 

The conclusion to which we are here led is that 
parts of the earnings of land, capital, entrepreneur, 
and labor are determined in each case by definite 
laws. There is, however, another share that is in- 
capable of reduction under any exact law, since its 
amount can only be determined by the relative mo- 
nopoly strength of the several factors in production. 
There is, however, no residual claim involved in this 
determination, since it may be secured in part by 
each and every factor in production. 



CHAPTER III. 

THE PRODUCTIVITY THEORY OP WAGES. 

Though Walker failed to establish his " Residual 
Claimant Theory of Wages," yet his discussion of the 
problem was not without importance as a protest 
against one phase of the " Wages Fund Doctrine." 
We have seen that Ricardo followed this doctrine to 
its legitimate conclusion, and held that the efficiency 
or productivity of labor did not affect wages in any 
direct way. We have now to see that Walker's 
theory of wages involved a vigorous protest against 
this necessary consequence of the " Wages Fund 
Doctrine." 

I. THE GENERAL PRODUCTIVITY THEORY OF WAGES. 

134. Walker's Contention. — In his " Political 
Economy," 1888 edition, Walker writes as follows : 
" In the theory of distribution here proposed wages 
equal the product of industry minus the three parts 
already determined in their nature and amount. In 
this view the laboring class receive all they help to pro- 
duce, subject to deduction on the three several ac- 
counts mentioned." (Page 248.) The three several 
accounts are, of course, rent, interest, and profit. 

" These three shares being cut off, the product of 
industry, the whole remaining body of wealth, daily 
or annually created, is the property of the laboring 

265 



266 VALUE AND DISTRIBUTION. 

class : their wages, or the remuneration of their ser- 
vices. So far as, by their energy in work, their 
economy in the use of materials, or their care in deal- 
ing with the finished product, the value of that product 
is increased, that increase goes to them by purely natu- 
ral laws, provided only competition be full and free." 
(Page 250.) 

That this writer was not entirely happy in his 
residual legatee illustration must, of course, be ad- 
mitted. It is, however, unfortunate that his critics 
have so strongly accented this phase of his argument 
as to obscure their view of the important truth con- 
tained in the closing sentence of the above paragraph, 
namely, — that wages are in some measure dependent 
upon the productivity of labor. This is, indeed, so 
manifest that we cannot but wonder that it was not 
until the last quarter of the present century that a 
conscious attempt was made to develop a productivity 
theory of wages. 

II. MARGINAL PRODUCTIVITY THEORY OF WAGES. 

It will be noted that Walker's contention that the 
laborer receives his entire contribution to the social 
product, or that wages are determined by the prod- 
uctivity of labor, leaves open the very important 
question, What productivity of labor is it that deter- 
mines the rate of wages? In other words, Walker 
here contents himself with a vague, indefinite con- 
cept of productivity, much as the advocates of the 
earlier utility theory of value contented themselves 



THE PRODUCTIVITY THEORY OF WAGES. 267 

with a vague, indefinite concept of utility. The dis- 
cussion, however, was not long allowed to remain in 
this unsatisfactory state. With the development 
of the marginal utility theory of value economists 
quickly saw that the value of labor, like the value of 
all other commodities, is in some measure determined 
by its marginal utility or productivity. 

135. Concrete and Abstract Concepts of Labor. 
— But before much progress could be made in the 
development of this thought it was necessary clearly 
to distinguish between two essentially different con- 
cepts of labor. In the development of the marginal 
productivity theory of interest we saw that there are 
two essentially different concepts of capital : first, as a 
sum of concrete commodities, tools, machines, etc., 
and, second, as an abstract mobile, homogeneous fund. 
The first to recognize the existence of similar con- 
cepts in the case of labor was Karl Marx, and in this 
he certainly made a most important constructive 
contribution to economic theory. 

Marx writes: "By making the coat the equivalent of 
the linen we equate the labor embodied in the former 
to that in the latter. Now, it is true that the tailor- 
ing, which makes the coat, is concrete labor of a dif- 
ferent sort from the weaving, which makes the linen. 
But the act of equating it to the weaving reduces 
the tailoring to that which is really equal in the two 
kinds of labor, to their common character of human 
labor. In this roundabout way, then, the fact is ex- 
pressed, that weaving also, in so far as it weaves 



268 VALUE AND DISTRIBUTION. 

value, has nothing to distinguish it from tailoring, 
and consequently is abstract human labor." (Page 
12, Part I. Chap. I.) (The italics are mine.) 

Or as the abstract mobile, homogeneous fund of 
capital finds concrete embodiment in loom and forge, 
so, too, the abstract mobile, homogeneous fund of labor 
finds concrete embodiment in weaver and blacksmith. 
I do not mean to say that Marx saw this parallelism 
between capital and labor, for his whole argument 
would refute any such claim. But that he did have 
a fairly clear notion of the two concepts of labor, first 
as an abstract fund, and second as a concrete embodi- 
ment of this fund, can hardly be denied. So, too, 
when he talks of "socially necessary labor" as the 
ultimate measure of value, he doubtless had in mind 
the earnings of the abstract, mobile, homogeneous 
fund of labor. 

By far the clearest and ablest development of this 
phase of the theory of wages is found in an article by 
J. B. Clark on " The Law of Wages and Interest," 
which was published in the " Annals of the Ameri- 
can Academy," and from which we have already 
quoted in our review of the productivity theory of 
interest. We shall here take the liberty of abstract- 
ing Clark's argument in regard to wages in a some- 
what free manner. 

As the entrepreneur pays a certain level average 
or, better still, minimum rate of interest for the money 
he has borrowed and invested in machines and tools, 
so, too, he pays a certain minimum rate of wages to 



THE PRODUCTIVITY THEORY OF WAGES. 269 

the laborers whom he employs. Special machines 
and men may earn much more than this so-called 
.minimum or normal rate, but if they do, it is in 
their concrete and not in their abstract character. 
In other words, there is frequently a wide difference 
between the earnings of the concrete loom or weaver 
and the earnings of capital and labor conceived as 
abstract, mobile funds. The earnings of the concrete 
forms are usually determined under monopoly con- 
ditions, while the earnings of a mobile, homogeneous 
fund are necessarily determined under conditions of 
free competition or under the conditions of normal 
value. It follows from this that in any discussion 
of normal wages we have to deal, not with special 
concrete forms of labor, but with labor as a mobile, 
homogeneous fund, capable of taking any form the 
entrepreneur may desire. 

136. The Abstract Fund remains constant while 
Concrete Forms change. — Here, too, the parallel- 
ism between labor and capital is complete. As ma- 
chines wear out and are replaced from their previous 
earnings, so, too, particular laborers become super- 
annuated and die ; in the mean time they have reared 
others to take their places ; in this way it becomes 
possible to transfer the abstract fund from one con- 
crete form to another. If the wages of textile labor 
fall below those of iron-working, the younger men 
as they grow up will prefer the trades connected 
with the latter industry. It is in this way that 
the mobility of the abstract fund is maintained. 



270 VALUE AND DISTRIBUTION. 

It is true that there are direct transfers of mature 
men from one industry to another, and with the 
continued subdivision of labor this becomes more 
and more frequent; but it should also be remem- 
bered that there is considerable mobility of the 
abstract fund due to the diverting of the younger 
men from the less remunerative to the more remu- 
nerative trades. 

137. The Rate of Wages determined by the Mar- 
ginal Productivity of Labor. — In our discussion of 
the productivity theory of interest we saw that if to 
a fixed fund of labor we add successive increments 
of capital, " the last dose of capital," to use Von 
Tinmen's phrase, is compelled to find employment 
in the least profitable industry. As it is a mobile, 
homogeneous fund of capital that we are here con- 
sidering, it is manifest, according to the law of mar- 
ginal utility, that the value of the whole fund is fixed 
by the productivity of the last dose or increment that 
finds employment, or that interest is determined by 
the marginal productivity of the abstract fund of 
capital. That this is also true of the abstract fund 
of labor may readily be shown. We have only to 
assume that the supply of capital remains constant, 
while successive increments are added to the fund 
of labor, to see that this labor will be compelled to 
find employment in less and less productive indus- 
tries, and that here, too, according to the law of mar- 
ginal utility, the value of the whole will be determined 
by the product of the last increment. In other words, 



THE PRODUCTIVITY THEORY OF WAGES. 271 

normal wages are fixed by the marginal productivity 
of the abstract fund of labor. 

, Nor is Clark alone in this recognition of the mar- 
ginal productivity of labor as the determinant of 
wages. In the " Proceedings of the American Eco- 
nomic Association," 1888, Dr. Stuart Wood pub- 
lished an article on "The Theory of "Wages," in 
which this proposition is very clearly enunciated. 
He writes : " No labor will be sold unless it pays 
somebody to buy it. Rather than abandon its use 
the buyer would prefer to pay for each particular 
act of labor a sum in proportion to its real utility to 
himself. But it does not follow that he must always 
pay so much as this, nor does it follow that labor, 
as a whole, is paid the full price which employers 
could afford to give rather than dispense with its use 
entirely. The price of all labor is regulated, as are 
the prices of all commodities, by its final utility ; by 
the utility, that is, of the portion which comes into 
use last; that portion, in short, whose services are 
least useful and least highly valued." 

III. THE ELEMENT OF TRUTH IN THE WAGES FUND DOCTRINE. 
138. Capital constant, Population increasing. — 
Under our last assumption, that the supply of capital 
remains constant while the supply of labor is in- 
creased, labor is forced into less and less productive 
industries, or, if you like, the laborer is forced to 
work with less efficient and possibly fewer tools. 
Population presses not upon land alone, but upon the 



272 VALUE AND DISTRIBUTION. 

whole environment. In other words, we have that 
neo-Malthusianism to which Malthus has called at- 
tention in his later editions. The free fund of labor 
being forced into less and less productive industries, 
and wages being fixed by the marginal productivity 
of labor, it is manifest that in this pressure of popu- 
lation wages are lowered. 

139. Population constant, Capital increasing. — 
Let us now reverse this assumption and inquire what 
will happen if population remains stationary while 
the free fund of capital increases. It is, of course, 
manifest that this will result in a complete reversion 
of the conditions we have just examined. Every 
laborer will have more efficient tools ; in other words, 
he will receive more and more help from his environ- 
ment, and the marginal productivity or the normal 
wages of labor will be increased. 

140. A Certain Best Ratio of Capital and Labor. 
— We need not, however, conclude that the gain of 
one factor is necessarily a loss for the other factor. 
For from the above argument it is not a far cry to 
the conclusion that with the given technical de- 
velopment of any country or time there is a certain 
ratio between the supply of labor and capital that 
will yield the best results for both factors. We 
have seen that with capital constant and the supply 
of labor increasing, the additional labor yields a 
diminished return; again, with labor constant and 
the supply of capital increasing, labor has the ad- 
vantage and capital must content itself with a dimin- 



THE PRODUCTIVITY THEORY OF WAGES. 273 

ished return. This, however, is only after the ratio 
of capital and labor has reached a certain point. 
Before reaching this point the additional labor or 
capital secures an increased return. Hence the 
point at which the transition is made from in- 
creasing to diminishing return is the ratio which 
yields the best return to both factors. It is only 
when we disturb this ratio that one factor's gain 
becomes another factor's loss. This may be well 
for the one who enjoys the advantage, but it is not 
so well for the others or for society as a whole. 
This evil tends, of course, to correct itself; for if 
those who control the fund of capital cannot secure 
a normal surplus, the tendency to save, and with it 
the increase of capital, will suffer a decline. This 
will continue until the balance is restored and capital 
again secures its normal return. So, too, labor will 
cease to increase in numbers or efficiency if it does 
not secure a similar normal surplus. 

141. Application to the Wages Fund Doctrine. — 
It will now be manifest how intimate is the relation 
between the supply of capital and the supply of 
labor, and how an increase in capital results in an 
increase in wages by raising the marginal produc- 
tivity of labor. This, then, is the soul of truth in 
the Wages Fund Doctrine. The relation between 
the two factors, however, is not so simple that we can 
obtain the rate of market wages by dividing the total 
capital by the total number of laborers. Again, it 
needs to be remembered that, just as up to a certain 

18 



274 VALUE AND DISTRIBUTION. 

point the rate of wages tends to increase with the 
supply of capital, so, too, up to a certain point the 
rate of interest tends to increase with the supply of 
labor. In conclusion, I would again call attention to 
the fact that we are here discussing not the earnings 
of loom or weaver, but the earnings of the mobile, 
homogeneous funds of capital and labor. 

IV. OBJECTIONS TO THE MARGINAL PRODUCTIVITY THEORY. 

It may be said that any attempt to formulate a 
productivity theory of wages is open to the same ob- 
jections that were urged against the productivity 
theory of interest. 

Even though we pass from the vague concept of 
general productivity to the very definite concept of 
marginal productivity, much still remains to be 
done ; for, as this margin is conditioned upon the 
supply of labor, it follows that any complete analysis 
must tell us something about the limitation of this 
supply. 

142. What determines the Margin of Production? 
What limits the Supply of Labor? — In the case 
of interest, we saw that this limitation was effected 
by the disutility or abstinence endured by the mar- 
ginal saver or capitalist. The question, therefore, 
presents itself, and is certainly an interesting one, 
How is this limitation of supply effected in the case 
of labor ? Is there here any interference with con- 
sumption that corresponds with the abstinence of the 
marginal saver? In Chapter V. we hope to show 



THE PRODUCTIVITY THEORY OF WAGES 275 

that there is some such interference ; but before 
doing so it will be necessary to disabuse the mind 
of one of the inherited traditions of economic theory. 
The impression made by the first edition of Malthus's 
" Essay on Population" was so strong that we con- 
tinue, more or less unconsciously, to think of wages 
as containing only a bare subsistence, or that labor 
does not, like capital, secure a surplus. If, however, 
it can be shown that normal wages may contain a 
surplus, it would suggest the possibility of construct- 
ing an "exchange theory of wages" identical in many 
respects with Bohm-Bawerk's " Exchange Theory of 
Interest." As the belief that wages can contain only 
a bare existence is largely due to the first edition of 
the " Essay on Population," we cannot do better than 
follow Malthus in his later editions, in which he re- 
pudiates this contention, and holds that all progress 
is conditioned upon a surplus in wages. 



CHAPTER IV. 

THE MALTHUSIAN THEORY OF WAGES. 

It hardly need be urged that in his " Essay on 
Population" Malthus set forth a cost theory of wages. 
In the first edition his general contention was that 
the sexual instincts or desires are so strong that any 
increase in the food-supply of the lowest classes can 
only result in a corresponding increase in the num- 
ber of their children ; and that this increase would 
be continued until population again pressed upon 
subsistence. In other words, he concludes that, in 
the long run, the laborer cannot hope to secure more 
than a bare existence. This is equivalent to saying 
that the wages of labor cannot permanently exceed 
the cost of producing labor. 

I. THE EARLIER MALTHUSIAN THEORY OF WAGES. 

143. The Pressure of Population upon Subsist- 
ence. — In the development of his thesis, Malthus 
held that population tends to increase in a geomet- 
rical, and food in an arithmetical, progression, basing 
these conclusions very largely upon American expe- 
rience, where population had doubled every twenty- 
five years. This, of course, would soon result in a 
wide divergence between population and the supply 
of food. Without insisting upon the geometrical and 
arithmetical concepts, we may yet admit that popula- 

276 



THE MALTHUSIAN THEORY OF WAGES. 277 

tion does tend to outrun the food-supply, or that 
population does tend to press upon subsistence. 

144. The Function of Misery and Vice. — This 
brings us to the question, What influences are at 
work to restrain this tendency ? Malthus, in his 
first edition, replies : " These checks on population 
are, among mankind, misery and vice. . . . No pos- 
sible form of society could prevent the almost constant 
action of misery upon a great part of mankind if in 
a state of inequality, and upon all if all are equal." 
Again, he writes : " That the superior power of popu- 
lation cannot be checked without producing misery 
or vice, the ample portion of these two bitter ingre- 
dients in the cup of human life, and the continuance 
of the physical causes that seem to have produced 
them, bear too convincing a testimony." 

145. The Standard of Life. — It should be noted, 
however, that in at least one passage of the first 
edition we find some recognition of a different con- 
dition of society. Malthus writes : " In the different 
states of Europe there must be some variations in the 
proportion between the number of inhabitants and 
the quantity of food consumed, arising from the dif- 
ferent habits of living that prevail in each state. The 
laborers of the south of England are so accustomed 
to eat fine wheaten bread that they will suffer them- 
selves to be half starved before they will submit to 
live like the Scotch peasants. They might, perhaps, 
in time, by the constant operation of the hard law of 
necessity, be reduced to live even like the lower 



278 VALUE AND DISTRIBUTION. 

Chinese ; and the country would then with the same 
quantity of food support a greater population. But 
to effect this must always be most difficult, and every 
friend of humanity will hope, an abortive attempt." 
(Page 132, first edition.) 

Malthus, however, does not dwell long on this 
more hopeful view of society, for, on page 218, he 
writes : " The principal argument of this essay tends 
to place in a strong point of view the improbability 
that the lower classes of the people in any country 
should ever be sufficiently free from want and labor 
to attain any high degree of intellectual improve- 
ment." Again, on page 346, he writes : " It is un- 
doubtedly a most disheartening reflection that the 
great obstacle in the way of any extraordinary im- 
provement in society is of a nature that we can 
never hope to overcome." 

146. The Pressure not Remote but Immediate. — 
To Malthus's mind, this pressure of population upon 
subsistence is not a remote contingency, but an ever- 
present reality. In this connection he writes : " An 
event at such a distance might fairly be left to Provi- 
dence, but the truth is, that if the view of the argu- 
ment given in this essay be just, the difficulty, so far 
from being remote, would be imminent and imme- 
diate. At every period during the progress of civil- 
ization, from the present moment to the time when 
the earth had become like a garden, the distress for 
want of food would be constantly pressing upon all 
mankind if they were equal. Though the produce 



THE MALTHUSIAN THEORY OF WAGES. 279 

of the earth might be increasing every year, popu- 
lation would be increasing much faster, and the re- 
dundancy must necessarily be repressed by the peri- 
odical or constant return of misery and vice." (Page 
144, first edition.) Malthus also urges that at any 
given time, say the present, population is not in- 
creasing as fast it might if nature was more boun- 
tiful. Hence the pressure of population upon sub- 
sistence is everywhere an ever-present reality. So 
pessimistic a view of the future of the laboring classes, 
and, indeed, of society as a whole, could not but pro- 
voke much violent criticism ; and as a result of this 
criticism we find that as early as the second edition 
Malthus was forced to modify his earlier statement 
and to recognize that moral restraint also plays a part 
in checking the too rapid growth of population. Be- 
fore leaving the first edition it may be well clearly 
to understand the conditions under which it was 
written. 

147. The Issue between Malthus and Godwin. — 
The first edition of Malthus's " Essay on Population" 
appeared in 1798, and was in answer to an essay on 
" Avarice and Profusion," by William Godwin. The 
issue between these two writers is clearly stated in 
the latter part of the first edition of Malthus's " Es- 
say." He there writes: "The great bent of Mr. 
Godwin's work on political justice, if I understand it 
rightly, is to show that the greater part of the vices 
and weaknesses of man proceed from the injustice of 
their political and social institutions, and that if 



280 VALUE AND DISTRIBUTION. 

these were removed and the understandings of men 
more enlightened, there would be little or no temp- 
tation in the world to evil. It has been clearly 
jDroved, however (at least as I think), that this is an 
entirely false conception, and that, independent of 
any political or social institutions whatever, the 
greater part of mankind, from the fixed and unalter- 
able laws of nature, must ever be subject to the evil 
temptations arising from want." * 

Godwin, of course, reflected the movement in 
thought which in France had culminated in the 
Revolution. He held that the ills of life might be 
removed by changes in the social institutions of the 
time ; that it was these alone that interfered with the 
ultimate perfectibility of mankind. Malthus repudi- 
ated this doctrine of the periectibility of man, and 
held that there are subjective as well as objective 
difficulties to be encountered ; that the evil in the 
world, its pain and misery, are due not merely to the 
failure of social institutions, but, far more, to the 
strength of certain impulses or passions inherent in 
the very nature of man. Had Malthus confined 
himself to defending this thesis no confusion would 
have arisen, but, as a matter of fact, he practically 
held that these subjective causes are the only ones 
that are operative, and so was led to conclude that no 
improvement in the condition of the lower classes is 
possible. 

*P. 267, first edition, "Essay on Population." 



THE MALTHUSIAN THEORY OF "WAGES. 281 

II. THE LATER MALTHUSIAN THEORY OF WAGES AND THE 
CONDITIONS OF PROGRESS. 

In the third edition of the " Essay on Population" 
we find a tentative abandonment of that concept of 
society in which wages cannot, for any long time, 
exceed the bare cost of existence, or in which a large 
part of mankind is doomed to a misery whose only 
mitigation is to be found in vice. 

148. Virtue and Intelligence as Checks to Popu- 
lation. — In this third edition Malthus writes : " The 
evils arising from the principles of population are 
exactly of the same nature as the generality of other 
evils which excite fewer complaints ; they are in- 
creased by human ignorance and indolence and di- 
minished by human knowledge and virtue." (Book 
IV. Chap. III.) 

Again he writes : " From a view of the state of so- 
ciety in former periods compared with the present, I 
should certainly say that the evils resulting from the 
principle of population have rather diminished than 
increased, even under the disadvantages of an almost 
total ignorance of their real cause. And if we can 
indulge the hope that this ignorance will be gradu- 
ally dissipated, it does not seem unreasonable to ex- 
pect that they will be still further diminished. . . . 
On the whole, therefore, though our future prospects 
respecting the evils arising from the principle of 
population may not be so bright as we could wish, 
yet they are far from being entirely disheartening, 
and by no means preclude that gradual and progres- 



282 VALUE AND DISTRIBUTION. 

sive improvement in human society which, before 
the late wild speculations on the subject, was the 
subject of rational expectation." (Third edition, 
Book IV. Chap. I.) 

149. Increase of the Food Supply an Essential 
Condition of Progress. — This more hopeful view of 
society led Malthus to inquire in his later editions 
as to the conditions of social progress, and, as a re- 
sult of this inquiry, he concluded that a surplus in 
the supply of food is the primary and essential con- 
dition of this progress. This discussion first ap- 
peared in a volume which was published as an 
addition to the fourth edition, but its best statement 
is found in the seventh edition in a chapter devoted 
to " General Observations." He writes : " That an 
increase of population, when it follows in its natural 
order, is both a great positive good in itself and 
absolutely necessary to a further increase in the an- 
nual produce of the land and labor of any country 
I should be the last to deny. The only question is, 
What is the order of its progress ? In this point Sir 
James Stewart, who has in general explained this 
subject so well, appears to me to have fallen into 
error. He determines that multiplication is the effi- 
cient cause of agriculture, and not agriculture of 
multiplication. But though it may be allowed that 
the increase of people beyond what could easily sub- 
sist on the natural fruits of the earth first prompted 
man to till the ground, and that the view of main- 
taining a family, or of obtaining some valuable con- 



THE MALTHUSIAN THEORY OF WAGES. 283 

sideration in exchange for the products of agriculture, 
still operates as the principal stimulus to cultivation, 
yet it is clear that these products, in their actual state, 
must be beyond the lowest wants of the existing popula- 
tion before any permanent increase can possibly be 
supported." (Page 382.) " And in the same manner, 
with a view to any essential improvement in the condi- 
tion of the laborer, which is to give him a greater com- 
mand over the means of comfortable subsistence, it is 
absolutely necessary that, setting out from the loivest 
point, the increase of food must precede and be greater 
than the increase of population." (Page 383, seventh 
edition.) 

150. Manufactures and an Advancing Standard 
of Life. — Despite this insistence upon an increase of 
the food supply as the primary condition of progress, 
Malthus sees quite clearly that so long as the bulk 
of the wages of the laboring classes is expended for 
food there is little hope for any permanent improve- 
ment in their condition. In a foot-note on page 130 
of the fourth edition we find some hint of the process 
by which, as Malthus believes, this improvement will 
be effected. He there writes : " The condition of the 
laboring poor, supposing their habits to remain the 
same, cannot be very essentially improved but by 
giving them a greater command over the means of 
subsistence. But an advantage of this kind must 
from its nature be temporary, and is therefore really 
of less value to them than a permanent change in 
their habits. But manufactures by inspiring a taste 



284 YALUE AND DISTRIBUTION. 

for comforts tend to promote a change in their habits, 
and in this way jDerhaps counterbalance all their dis- 
advantages."* 

Malthus here continues to hold, as in the first edi- 
tion, that a " greater command over the means of 
subsistence or of food will eventually stimulate the 
growth of population, and so only helps the laborer 
temporarily." He then finds that their only hope is 
in an advancing standard of life or in an increased 
taste for the comforts of life, and that this is fostered 
by the growth of manufactures. His agrarian in- 
stincts led him, in his earlier editions, to deprecate 
the rapid growth of the towns, with their bad air and 
general overcrowding. He, indeed, saw in these 
towns the great menace to civilization. Hence, in 
the above passage, in which he urges that the growth 
of manufactures is an essential condition of progress, 
we find important evidence of the change that had 
gradually taken place in his views of society. 

151. Progress depends on the Supply of Capital 
as well as on the Supply of Land. — Malthus, in 
his seventh edition (page 374), makes a further ad- 
vance by showing how manufactures may effect an 
advance in the standard of life despite an increasing 
pressure upon the food supply. He writes : " In 
the natural progress of cultivation and wealth the 



* The best modern statement of this contention is given by 
F. H. Giddings in " The Modern Distributive Process," page 
54. 



THE MALTHUSIAN THEORY OF WAGES. 285 

production of an additional quantity of corn will 
require more labor, while, at the same time, from 
the accumulation and better distribution of capital, 
the continual improvements made in machinery, and 
facilities opened to foreign commerce, manufactures 
and foreign commodities will be produced or pur- 
chased with less labor, and consequently a given 
quantity of corn will command a much greater 
quantity of manufactures and foreign commodities 
than while the country was poor. Although, there- 
fore, the laborer may earn less corn than before, the 
superior value which every portion which he does 
not consume in kind will have in the purchase of 
conveniences may more than counterbalance this dim- 
inution. He will not, indeed, have the same power 
of maintaining a large family, but with a small 
family he may be better lodged and clothed, and 
better able to command the decencies and comforts 
of life." 

It hardly need be urged that Malthus here has in 
mind a progressing society. This, of course, is in 
sharp contrast with the concept of a stationary or 
retrograding society, which lies back of all the rea- 
soning of the first edition of his " Essay." And 
while he holds that the bounty of nature is the ini- 
tial cause of all progress, yet he recognizes that it 
is not land alone, but the condition of the whole en- 
vironment, that determines the progress of mankind 
to a better and fuller life. 

The bounty of the environment gives rise to new 



286 VALUE AND DISTRIBUTION. 

desires. These continue to be gratified as luxuries till 
by and by they become necessities ; the standard of 
life has advanced and population again presses upon 
the environment. From this it follows that if further 
progress is to be made, the environment must again 
yield a surplus above this standard of life. Again, 
new desires arise, are gratified, and become fixed, 
the standard is again advanced, and another step in 
social progress is effected. There is still a pressure 
between population and environment, but it is no 
longer the environment pressing down, but the in- 
dividual pressing up. There is still a struggle for 
existence, but it is for a higher and nobler existence. 
There is still a survival of the fittest, but it is not a 
survival of those fitted to endure a more and more 
impoverished environment, but a survival of those 
fitted to enjoy an ever-improving environment. It 
is no longer misery and vice, but the bounty of the 
whole environment and a growth in moral power that 
gives rise to an ever-advancing standard of life.* 

* Darwin makes generous acknowledgment for the sugges- 
tions which he found in the " Essay on Population." But while 
his views accord with those contained in the first edition of 
the " Essay," they are at variance with those expressed in the 
later editions, notably the seventh. In that edition Malthus 
seems to suggest a Lamarckian rather than a Darwinian ex- 
planation of the phenomenon of progress. For he finds that 
all progress is affected through changes in the tastes and 
desires of mankind or through the volition of the organism. 

Darwin, on the contrary, holds that like produces like with 
a tendency to vary, and that those species survive whose varia- 



THE MALTHUSIAN THEORY OF WAGES. 287 

152. Malthus's Changed View of Society. — In how 
far Malthus's change of attitude was due to the im- 

tions happen to be in harmony with the changed environment. 
All is here left to the chapter of accidents, the volition of the 
individual counting for naught. So long as we confine our- 
selves to a study of the lower forms of life there is much to sup- 
port this contention, for it is undoubtedly true that the envi- 
ronment here dominates the situation, but as we pass to the 
higher organic and super-organic phenomena the self-deter- 
mining power of the individual asserts itself with ever-in- 
creasing power. Indeed, it might be said that the evolution of 
all organic forms is but an escape from the domination of the 
environment or a growth in self-determining power. This is 
clearly recognized by men of Darwin's school when they study 
these higher phenomena. Mr. Spencer, for instance, writes in 
regard to the evolution of conduct as follows : " We saw that 
conduct is distinguished from the totality of actions by ex- 
cluding purposeless actions, but during evolution this distinc- 
tion arises by degrees. In # the very lowest creatures most of 
the movements from moment to moment made have not more 
recognizable aims than the struggles of an epileptic. . . . 
Their conduct is constituted of actions so little adjusted to 
ends that life continues only so long as the accidents of the 
environment are favorable. A higher form, as a rotifer, by 
better adjusting its own actions becomes less dependent upon 
the actions going on around it, and so preserves itself for a 
longer period." (" Data of Ethics," p. 11.) 

In other words, though it be true that in the evolution of 
lower forms "nature is red in tooth and claw," 3-et this gives 
us no warrant for assuming that the same conditions must 
prevail in the evolution of the higher forms. Or, to again 
return to economic terms, it may be said that in the future 
social progress will depend less upon the direct pains of labor 
and more upon the disutility of abstinence. 



288 VALUE AND DISTRIBUTION. 

provement in the condition of the masses in France 
subsequent to the Revolution it is, of course, impos- 
sible to say. But we do know that in his later 
editions he refers to this improvement upon more 
than one occasion. (See pages 189 and 320 of the 
seventh edition.) 

In any event, there can be no question about his 
complete change of attitude towards the whole social 
problem. He no longer has in mind that stationary 
condition of society in which the laborer cannot hope 
to secure more than a bare existence. Instead, he 
contemplates a hopeful progressing society in which 
the laborer secures a surplus not only above a bare 
existence but above an ever-advancing standard of 
life. It must be borne in mind, however, that it is 
still a cost theory of wages that Malthus has in mind. 
In his first edition we have a theory of normal wages 
in a stationary society, while in his later editions 
he seeks to establish a theory of normal wages in a 
progressing society. This is a point on which we 
shall have more to say in the next chapter. 

153. The Unfair Treatment of Malthus. — In con- 
clusion, it may be noted that some economists con- 
tinue to this day to direct their criticism against the 
teachings of the first edition of the " Essay on Popu- 
lation." For them the "Essay" has never gotten 
beyond the first, or at most the second, edition. Mal- 
thusianism continues to be defined as that pressure 
of population upon subsistence which is only relieved 
by the direful remedies of misery or vice. Even 



THE MALTHUSIAN THEORY OF WAGES. 289 

when notice is taken of the fact that in his second 
edition Malthus recognized that moral restraint 
played an important part, this fact is only employed 
to refute the argument of the first edition. It is 
certainly time that some protest was entered against 
this essentially unfair treatment of one of the ablest 
of English-speaking economists. In common fair- 
ness it should be remembered that Malthus entirely 
abandoned this contention as well as the concept of 
society lying back of it. In other words, he no 
longer has in mind that concept of society in which 
the best that can be hoped for is that the conditions 
of life will not become worse. Instead, he sees a 
hopeful progressing society in which the passing 
years will bring an improvement in the condition of 
even the lowest classes. 



19 



CHAPTER V. 

THE NORMAL VALUE THEORY OF "WAGES. 

I. THE GAIN AND ABSTINENCE OF LABOR. 
Having followed Malthus in his escape from the 
pessimistic view of society which characterized the 
first edition of his " Essay," we are now in a position 
to recognize the fact that normal wages may contain 
a surplus above the mere cost of subsistence. This 
nowhere finds clearer statement than from the pen 
of F. H. Giddings in " The Modern Distributive 
Process." On page 54 he writes : " Nature makes 
generous advances to her children, but inexorably 
enforces payment. A given amount of food con- 
tains more energy, usually to be set free through its 
consumption, than was expended in obtaining it. 
Consequently, the value of work is usually a little 
more than the value of the antecedent work from 
which it was evolved. To these advances, persistently 
utilized, — advances converted into abilities, abilities, 
in turn, put forth in works, — the progress of man- 
kind from savagery to civilization has been due." 
In other words, social progress is dependent upon 
the existence of a surplus in normal wages in excess 
of the amount necessary to maintain the existing 
standard of life. It is to this surplus that I would 
restrict the term gain of labor, and the contention of 
the present chapter will be that this gain of labor is 

290 



THE NORMAL YALUE THEORY OF WAGES. 291 

in all respects similar to that surplus return from 
capital to which the name interest has been given. 
It will be further urged that in the case of both of 
these surpluses we are dealing with a mobile, homo- 
geneous fund, and so with normal value ; that both 
are equated to some disutility, abstinence, or inter- 
ference with consumption, and that in both of them 
there is an exchange of present for future goods. 
From this it follows that a theory of wages may be 
constructed which is practically identical with the 
" Normal Value Theory of Interest." 

Much of the work necessary for the construction 
of such a theory has already been done by other 
economists. A review of their work will therefore 
be in order. In the review of the productivity 
theory of wages it was seen that labor like capital 
may be conceived either in its concrete forms of 
weaver and spinner or as a mobile, homogeneous 
fund, and that just as the interest on capital is the 
earning of the mobile fund of capital, so, too, the 
gain of labor is the earning of a similar mobile fund 
of labor. 

154. Clark's Failure to recognize the Abstinence 
of Labor. — We have seen that the first to set forth 
in any complete way the important distinction be- 
tween the concrete forms and the abstract mobile 
funds of capital and labor was J. B. Clark. Unfor- 
tunately, however, Clark did not follow the similarity 
between capital and labor to its legitimate conclusion, 
for he failed to see that there is a sacrifice of absti- 



292 VALUE AND DISTRIBUTION. 

nence on the part of the laborer as well as on the part 
of the capitalist. In this connection Clark writes : 
" Labor is not the only sacrifice incurred in the cre- 
ating of wealth. Abstinence entails a sacrifice and it 
increases the fruits of industry." * 

It is here manifest that to this writer's mind the 
sacrifice of labor and the sacrifice of abstinence are 
two essentially different forms of sacrifice. In other 
words, he is here still in bondage to the older Mal- 
thusian notion that wages yield a bare subsistence. 
Yet, as has been shown in the preceding chapter, 
the moment we pass to the concept of a progressing 
society we see that normal wages must include a 
surplus. If the similarity which Clark has sought 
to establish between labor and capital has any sub- 
stantial basis in fact, it should lead us to suspect the 
existence of some sort of abstinence on the part of 
the laborer, to be equated to this surplus in his 
wages ; just as the abstinence on the part of the 
capitalist is equated to his surplus or interest. The 
failure of economists to recognize the existence of 
an interference with consumption in the experience 
of the laborer is readily explained. The earlier 
economists were interested in the problem of increas- 
ing the total wealth of a people or nation rather 
than in the problem of distribution. Modern econo- 
mists, it is true, have taken more interest in the 

* " Distribution as determined by a Law of Rent," Quar- 
terly Journal of Economics, 1891. 



THE NORMAL VALUE THEORY OF WAGES. 293 

latter problem, but they have largely confined them- 
selves to an attempt to determine the shares secured 
by men as producers, ignoring for the most part their 
interest as consumers. 

155. Patten on the Abstinence of Labor. — The 
first to abandon this traditional attitude and seriously 
to inquire as to the effect of consumption upon the 
distribution of wealth was S. N. Patten, who, in his 
" Theory of Dynamic Economics," writes as follows : 
" Every increase of productive power lengthens the 
time during which a man can work and have a sur- 
plus ; but with every increase in the quantity pro- 
duced more time is needed to consume it. The time 
needed to consume goods cuts in on the time which 
might be used to produce them, preventing the day's 
work from being prolonged until the effort of pro- 
duction equals the pleasure of consumption. 

" Let us assume that a man occupies eight hours 
in sleep. Sixteen hours are thus left for work and 
leisure, or for production and consumption. If the 
man works after supplying the necessities of life, the 
return must be high enough to pay for the pain of 
production and the pleasure in consumption which 
he loses by spending his time in work." (Page 57.) 

" When the productive power of society has in- 
creased beyond a certain point, the efficiency of the 
workman becomes so great that the time needed to con- 
sume what he has produced cuts into the time needed 
for production ; he ceases to work before the pain of 
the last increment of production equals the utility of 



294 VALUE AND DISTRIBUTION. 

the last increment of consumption. There is for the 
efficient workman a surplus at the margin of pro- 
duction equal to the pleasure that could be obtained 
in using their time in unproductive consumption." 
(Page 71.) " The sacrifice of the capitalist, therefore, 
is of the same nature as the sacrifice of the laborer 
when the latter gets a surplus above the cost of his 
labor." (Page 60.) 

In this recognition of an abstinence on the part 
of the laborer identical in all respects with the ab- 
stinence on the part of the capitalist we have one of 
the most important contributions that has yet been 
made to the theory of normal wages. 

156. Clark's Restatement of Patten's Conten- 
tion. — Clark, in a review of "The Theory of Dy- 
namic Economics," generously recognizes the great 
importance of Patten's contribution, and holds that it 
is an epoch-making book. He then restates the case 
in regard to the abstinence of labor in his own happy 
way. " It may well be that the last hour of labor in 
a day secures to the worker something that, in itself 
alone, is worth to him more than it costs in the way 
of mere fatigue ; but if the gaining of it entails the 
imperfect utilization of other things already in pos- 
session, then the acquisition of it may be unprofitable. 
It will afford no surplus.* 

" This fact, stated in another way, reveals a prin- 
ciple to which increasing interest and importance 

* Annals of American Academy, July, 1892, p. 40. 



THE NORMAL VALUE THEORY OF WAGES. 295 

attaches as the industrial process perfects itself. 
The sacrifice involved in labor itself is coming to be 
largely abstinence. Confinement rather than fatigue 
is the cause of it, and this confinement burdens the 
man by that withdrawing of utility from things al- 
ready in his possession, to which attention has just 
been called. To the man who is confined for most 
of his waking time nothing is really worth what it 
should be, and some things are worth very little. 
He cannot utilize them. Though he may have them 
in his house he is kept from enjoying them. The 
man who works twelve hours a day is the typical ab- 
stainer of our modern economy. The saddest feature 
of his abstinence is that it is practised on things that 
he actually possesses. He abstains from the full use 
of his house, his garden, and his furnishings and 
decorations. He foregoes much of the enjoyment of 
his books and papers, and even of the comelier part 
of his wardrobe. He has little time for wearing good 
clothes, for sitting on porches in summer, or before 
fireplaces in winter. He lacks leisure for reading, 
etc. 

" What is worse, this lack of time takes the essen- 
tial utility out of the free gifts of nature. It puts a 
blight on air and sunlight. It spoils, for this par- 
ticular man, the trees, the streams, the hills, etc. 
' We want to see the sunshine,' the worker is made 
to say in a somewhat familiar rhyme that expresses 
the eight-hour movement. It is the increase of 
utility that, for the men engaged in this struggle, two 



296 VALUE AND DISTRIBUTION. 

extra hours of leisure would infuse into their entire 
environment that is the real object to be secured. 
This man wants to make the sun worth something 



" :j: 



II. A NORMAL VALUE OR AN EXCHANGE THEORY OF WAGES. 

With the data in hand we might readily construct 
an abstinence theory of wages that would be identical 
in all respects with the abstinence theory of interest. 
This, however, would give us, in the one case as in 
the other, but a partial solution for the problem. We 
are here dealing with a mobile, homogeneous fund, 
or with normal value ; hence disutility and utility, or 
abstinence and productivity, must be equated. The 
marginal saver will not endure the disutility of ab- 
stinence unless he receives a corresponding surplus 
in his future product. It follows from this that any 
satisfactory solution of the interest problem must take 
account of productivity as well as of abstinence. 
While special laborers may receive more or less than 
normal wages, all labor that is free to move must re- 
ceive at least normal wages. How much this will be 
is determined by the product of such free labor in the 
least productive branch of the whole field of indus- 
try ; in other words, by the marginal productivity of 
labor. This raises the question, How is this margin 
or the supply of labor determined ? The answer is as 
follows : The increase in the amount or efficiency of 
labor depends, in the first instance, on the realization 

* Annals of American Academy, July, 1892, p. 41. 



THE NORMAL VALUE THEORY OF WAGES. 297 

of a surplus in the product of labor above the cost 
of maintaining the present supply of labor at the 
existing standard of life. But in order to secure this 
surplus the hours of labor are prolonged beyond the 
point which would be sufficient to maintain existing 
conditions. This extension of the hours of labor in- 
volves a postponement of present enjoyment or an 
increasing abstinence on the part of the marginal 
laborer. It is this abstinence, therefore, which ope- 
rates in restraint of the extension of the hours of 
labor, and so of the realization of that surplus in 
wages which is the necessary condition of an in- 
crease in the amount or efficiency of labor. In brief, 
then, the supply of labor, and so the margin of 
production, is determined by the disutility or absti- 
nence endured by the marginal man who postpones 
his consumption in order that he may continue his 
labor. 

It might further be urged, in support of the Normal 
Value Theory of Wages, that it is capable of state- 
ment in much the same terms as Bohm-Bawerk's 
Exchange Theory of Interest. We have already 
seen that we are here dealing with normal value, or 
with those conditions in which marginal utility and 
marginal disutility coincide. It only remains for us 
to show that in the gain of labor, as in the interest 
on capital, the increase in value is a function of time, 
and that somewhere along the line the laborer ex- 
changes present for future goods. 

157. The Time Utilities of Labor. — In an earlier 



298 VALUE AND DISTRIBUTION. 

chapter we learned that capital has to do with utili- 
ties of time. That is to say, interest arises wherever 
time is necessary to mature the value of any com- 
modity. It matters not whether this time is necessi- 
tated by the course of the season, as in agriculture ; 
by that gain of power with a sacrifice of time which 
is incident to all machine production ; by the season- 
ing of lumber, the curing of skins, the aging of wine, 
or the returning heat of summer which arouses the 
demand for and so increases the value of the ice cut 
months before, — all involve an increase of value as a 
function of time. And so we are led to conclude that 
wherever time necessarily intervenes between the first 
investment and the realization of the product in its 
fully matured value interest will arise. Eliminate 
time as a condition of the increase in value, or as- 
sume that the increase is an instantaneous process, 
and the surplus which we know as interest fails to 
appear. 

But while it has been generally recognized that 
natural forces other than labor need time in which to 
realize or manifest themselves, we have unconsciously 
continued to think of labor force as though it was 
exerted instantaneously or as not requiring an appre- 
ciable interval of time in which to manifest itself. 
We say that this has been a more or less unconscious 
assumption, for the moment we give the matter any 
consideration we recognize that labor force, like all 
other natural forces, is subject to time limitations. 
From this it follows that the time necessary for the 



THE NORMAL VALUE THEOEY OF WAGES. 299 

exercise of the laborer's power may cut in on the 
time necessary for consumption, and so result in an 
abstinence on the part of the laborer. 

158. The Exchange by the Laborer of Present 
for Future Goods. — If there is any abstinence or 
postponement of enjoyment on the part of the 
laborer there must in some way be an exchange of 
present for future goods. We are here met by the 
difficulty that in the payment of wages it is the 
capitalist and not the laborer who surrenders his 
claim on present or consumption goods, receiving in 
exchange unfinished products or future goods. This, 
of course, would serve as an explanation of interest, 
but if we are to account for the gain of wages, we 
must show that in some way the laborer surrenders 
his claim on present goods, receiving in exchange 
some form of unfinished or future goods. This, 
however, is not so difficult a matter as at first might 
appear. For the payment of wages by the capital- 
ist is, after all, the second step in the transaction. 
The first step is that in which the laborer post- 
pones the enjoyment of the free and other present 
goods under his control that he may continue his 
hours of labor. For this he receives in exchange 
the unfinished products of his labor or future goods. 
Later on he exchanges these unfinished products for 
present goods in the form of wages. 

159. Confusion in Patten's Use of the Terms Cost 
and Surplus. — This brings us to a source of confusion 
which was developed in Patten's discussion of the 



300 VALUE AND DISTRIBUTION. 

subject, and which it may be well to dispose of at 
this point. 

Patten writes : " The sacrifice of the capitalist, 
therefore, is of the same nature as the sacrifice of the 
laborer, when the latter gets a surplus above the cost 
of his labor. The laborer gets this surplus because 
he abstains from some action which would have given 
him the same surplus. Like the capitalist, he is paid 
in this case for a negative act and not for a positive 
cost. Viewed from the position of society, neither of 
these acts is a cost, as they do not increase the positive 
pain which the members of the society must undergo. 
Viewed from the position of the buyer of goods, 
both are costs, because he must give a larger quantity 
of goods to get the articles they produce. Absti- 
nence of either kind is a negative cost which affects 
the value of goods in distribution, but neither is a 
positive cost increasing the pains of production. To 
delay a pleasure or to change from one occupation to 
another is not the same thing as to undergo a pain, 
though they have the same effect on the value of the 
goods to consumers. Aggregate costs, therefore, are 
composed of two elements, — the positive cost of pro- 
duction and the negative cost of abstaining from the 
surplus which might be obtained by actions in less 
complete conformity to the interests of society. 
When it is said that marginal values equal the cost 
of production, a surplus in the form of interest and 
wages is added to the real cost." (Page 60.) 

Now, not only are the terms positive cost and 



THE NORMAL VALUE THEORY OF WAGES. 301 

negative cost far from happy, but the contention 
that one is a real cost and the other a surplus is 
distinctly misleading. And so we find that Clark, in 
his review of " The Theory of Dynamic Economics," 
takes exception to Patten's use of the terms cost and 
surplus. This discussion was continued through sev- 
eral numbers of the Annals of the American Academy 
without reaching any very definite result. To the 
present writer it has seemed that the source of the 
confusion lies in the tendency to confound the two 
essentially different concepts of society. In a sta- 
tionary society cost is the actual wear and tear of the 
tissue of capital and labor involved in production. 
In a progressing society cost equals the above wear 
and tear of tissue plus the disutility or abstinence in- 
curred in securing that surplus which increases the 
supply of capital and labor. Both are social costs, 
for both are equated to normal value. In one in- 
stance, however, we are dealing with cost and normal 
value in a stationary society, and in the other with 
cost and normal value in a progressing society. In 
other words our concept of cost must vary with the 
supply of capital and labor that is assumed. If 
we desire to maintain the existing conditions, cost 
would include only the wear and tear of the existing 
supply of capital and labor. If, however, we have a 
progressing society in mind and so imply an ever-in- 
creasing supply of capital and labor, then the absti- 
nence incident to the maintaining of this increasing 
supply is as essential a part of our cost as the wear 



302 



YALUE AND DISTRIBUTION. 



and tear of the original supply. From this it fol- 
lows that the interest on capital and the gain of labor 
are surpluses if we have in mind the maintaining 
of existing conditions. On the other hand, they are 
part of our costs if we have in mind an increasing 
supply of capital and labor or a progressing society. 
160. The Modification of Patten's Diagram. — 
The diagram referred to is Fig. 5, page 58 of the 
present volume. The suggested change is shown 
in Fig. 11, in which the interest on capital and the 



Fig. 11. 



Cost in a Pro- i 
gressing So- ' 
ciety 




Normal Surpluses 



Cost in a Stationary 
Society 



gain of labor are shown as a part of the cost in a pro- 
gressing society and as surpluses in a non-progressing 
society. In the latter case they are included, as is 
here shown under normal surpluses. 

161. The Normal Value Theory only applies to 
Normal Conditions in a Progressing Society. — The 
preceding diagram will serve to bring out very 
clearly the scope and limitations of the theory of 



THE NORMAL VALUE THEORY OF WAGES. 303 

wages here proposed. In the first place, and as its 
name implies, it is a theory of normal wages. Again, 
it is only applicable to normal wages in a progressing 
society, for in a stationary society the normal sur- 
pluses, interest on capital and gain of labor, would 
disappear. If it is urged that the theory gives but 
a partial solution of the wages problem ; that it in 
no way accounts for market wages, we must admit its 
deficiency. On the other hand, it might be urged that 
market wages like all scarcity prices are incapable of 
exact determination or of reduction under anything 
like an exact law. (See Sections 121, to 123.) Nor- 
mal wages are, however, capable of exact determina- 
tion, and in a progressing society they include a gain 
which is equated to an abstinence on the part of the 
laborer. 

A theory which seeks to account for a surplus in 
wages above the cost of maintaining the laborer is 
likely to meet with serious opposition. Many of us 
still hold to that conception of society which ob- 
tained in the beginning of the century. We fail 
fully to realize that in a progressing society both 
capital and labor must secure a surplus above the 
cost of maintenance. We see this surplus quite 
clearly in the case of capital, because it is frequently 
the object of a separate payment. In the case of 
wages the surplus is not thus rendered manifest, the 
payment being in the form of the total amount and 
not of the surplus alone. And yet, if there is any- 
thing in the contention that there is a necessary re- 



304 VALUE AND DISTRIBUTION. 

lation between capital and labor as mobile, homoge- 
neous funds, it follows that if interest is a necessary- 
condition of progress, then the gain of labor is like- 
wise a necessary condition of such progress. 

162. Failure to secure this Gain due to Loss of 
Mobility. — Finally, it may be urged that even in a 
progressing society there are many who do not secure 
any such surplus or gain of labor. We are here 
dealing with a question of fact, and must perforce 
admit that it is too often true. This, however, does 
not tell against the contention that in every progress- 
ing society normal wages must contain a surplus. 
For the surplus that we here have in mind is in- 
cluded in the earnings of labor as a mobile fund. If 
you interfere in any way with the mobility of this 
fund, you manifestly change the conditions of the 
problem, whether it is capital or labor that you have 
in mind. For instance, when power-looms superseded 
the old hand-loom much distress was undoubtedly oc- 
casioned. Certain portions of the mobile fund of 
labor had become fixed in the concrete form of 
hand-loom weavers, and the distress was in large 
measure due to the fact that these men had lost their 
mobility and could not readily adapt themselves to 
the new conditions. This, however, was just as true 
of the capital invested in the old hand-loom as it 
was of the weaver. Yet no one would argue from 
this that capital does not yield a surplus. 



RESUME. 

I. VALUE. 

163. The Cost Theory and its Failure. — The 
present volume has been written to little purpose 
if it has not made clear how intimate is the relation 
between the problem of value and the problem of 
distribution. It was this, indeed, that compelled me 
to preface the discussion of distribution with a review 
of the literature on the theory of value. In Chapter 
II. it was seen that the marginal cost theory of value 
failed because scarcity values are not the exception, 
but the rule. The prevalence of these scarcity goods 
means that among general commodities the price fre- 
quently contains a surplus, even for the marginal 
producer. From this it follows that even marginal 
cost must fail as the ultimate standard of price. 

164. The Utility Theory and its Failure. — In 
Chapter IV. it was shown that the marginal utility 
theory fails for a like reason, — to wit, that the price 
frequently contains a surplus for the marginal con- 
sumer. Or, just as the Marginal Cost Theory rests in 
last resort upon the assumption of ideal free competition 
among producers, so too the Marginal Utility Theory 
rests upon a like unwarranted assumption of ideal 

20 305 



306 VALUE AND DISTRIBUTION. 

free competition among consumers. Any failure in 
this ideal condition will result in a marginal con- 
sumers' surplus, and in all such cases the Margi- 
nal Utility Theory fails as the ultimate standard of 
price. 

165. Price determined between Limits. — In Chap- 
ter V. the monopoly theory of price was discussed. 
It was there urged that the marginal utility of the 
good to the consumer and its marginal utility to the 
producer only set the upper and lower limits within 
which the price may vary. It was also maintained 
that the point between these limits at which the 
price is actually fixed is more or less indeterminate, 
since it depends upon the relative monopoly strength 
of buyer and seller. From this it was concluded that 
the phenomena of price cannot be reduced under any 
exact law. 

166. Cost and Price. — In Chapter VI. it was 
shown that in the case of freely reproducible goods 
price is directly and exactly measured by the mar- 
ginal cost of production. Again, it was shown that 
while scarcity prices are not directly and exactly 
measured by cost, yet some concept of cost does 
enter into our determination of the price of such 
goods. Of course, it is not the cost of the scarcity 
good, but it is the cost of the next best substitute 
that enters into this determination ; for there is no 
good so rare or so valuable that some less efficient 
substitute cannot be found to replace it. 



RESUME. 307 

II. DISTRIBUTION. 

In the development of the theory of distribution, 
herein proposed, three forms of surplus have been 
recognized : 

Rent, or the differential surplus that does 
not enter into the determination of price. 

Profit, or the marginal surplus that does 
enter into the determination of price. 

Interest on capital and gain of labor, or 
the normal surpluses which enter into the deter- 
mination of price and into the social cost of pro- 
duction in a progressing society. 

It may be well to review in a rapid way the 
argument by which this scheme of distribution was 
developed. 

167. Rent. — In the review of the history of the 
doctrine of reut, it was seen that it was first de- 
veloped in connection with the old Corn Law agita- 
tion. It was practically the defence set up by the 
agrarian interest against the charge that high rents 
compelled the payment of high wages, and so inter- 
fered with the manufacturing interest of England. 
As a result of this, the doctrine of rent was, in Eng- 
lish economics, largely confined to the earnings of 
land. In Germany, however, where the manufac- 
turing interests were much slower in their develop- 
ment, this phase of the agrarian problem had not 
yet arisen ; hence we find that German economists 
did not so persistently restrict the doctrine of rent 



308 VALUE AND DISTRIBUTION. 

to the earnings of land. As early as 1807, Hufeland 
recognized that rent is a differential or price-deter- 
mined surplus, and that it is common to all the fac- 
tors of production. It has seemed wise, therefore, to 
follow the German economists, and to say that every 
price-determined surplus is the rent of the correspond- 
ing factor of production. 

168. Profit. — In this part of the discussion atten- 
tion was called to the fact that in many instances the 
marginal producer secures a surplus ; that this sur- 
plus enters into the determination of price, and so is 
in direct antithesis to rent or the price-determined 
surplus. To this marginal or price-determining sur- 
plus, whether secured by merchant, manufacturer, 
farmer, or landlord, the name profit has been given. 
It is distinguished from rent, as above set forth, and 
from interest, by the fact that it is a marginal or mo- 
nopoly surplus, while rent is a normal surplus. 

In reviewing this part of the literature, it was 
seen that there has been much confusion in the use 
of the term profit. Sometimes it is applied to the 
interest on capital ; at other times to the wages of 
the entrepreneur ; while, not unfrequently, the terms 
profit and interest are employed interchangeably. 
This confused use of the term profit is partly due 
to the fact that the earlier economists assumed that 
the prevailing economic conditions are those of free 
competition. Under such circumstances the marginal 
or monopoly surplus, to which I have restricted the 
term profit, would not appear. 



EESUME. 309 

The first to break with this earlier practice in 
regard to the term profit was Walker, who restricted 
it to that part of the entrepreneur's return which is 
a differential surplus and so follows the law of rent. 
It might, however, be urged that if this surplus 
follows the law of rent it would be much better to 
follow the German practice and call it the rent of 
the entrepreneur. We are thus enabled to restrict 
the term profit to the marginal or price-determining 
surplus. This, as was shown, is in entire agreement 
with the use of the term profit by the earlier econo- 
mists ; for, no matter how confused they may have 
been on other points, they were clear that profit is a 
surplus that enters into the determination of price. 
From this it follows that the term should not be 
applied to a surplus which confessedly does not enter 
into this determination. 

169. Interest. — In the discussion of this share of 
the social product we first reviewed the various theo- 
ries of interest, including the Exploitation, the Use, 
the Productivity, the Abstinence, the Marginal Prod- 
uctivity, and the Exchange Theory. The element of 
truth, as well as the defects of the several theories, 
was pointed out. The Exchange Theory was exam- 
ined with considerable care, and it was found that, 
while its author expressly repudiated abstinence as 
a factor in the problem, yet as a matter of fact he 
includes in his theory of interest all three of the 
essential elements, — time, productivity, and absti- 
nence. His formal ignoring of the part played by 



310 VALUE AND DISTRIBUTION. 

abstinence was seen to be due to his failure to recog- 
nize the fact that interest is a problem in normal 
value. In the development of this part of the argu- 
ment we drew very freely upon Clark's discussion of 
the two concepts of capital, — one as a sum of con- 
crete intermediate products ; the other as an abstract, 
mobile, homogeneous fund. It was also seen that 
interest per se is the earning of this mobile fund, 
and that it is determined by the marginal produc- 
tivity of this fund or by its product in the least 
productive industry in which its employment is 
economically permissible. Again, as interest is the 
earning of a mobile homogeneous fund, its determina- 
tion is clearly a problem of normal value. If this is 
true, then we can no longer content ourselves with the 
statement that the rate of interest is determined by 
the marginal productivity of capital. The question 
necessarily arises, What determines this margin or 
the supply of capital ? To this there is the manifest 
answer that it depends upon the abstinence or dis- 
utility endured by the marginal saver, for it is this 
abstinence that determines the increase of the supply 
of capital. This, however, conflicts in no way with 
Bohm-Bawerk's contention that interest is the differ- 
ence in value between present and future goods. 
Instead, it confirms that contention in the strongest 
possible way. To the exchange theory as thus 
amended we gave the name The Normal Value 
Theory of Interest. 

170. Wages. — In the review of the literature of 



RESUME 311 

this part of our subject the various theories of wages 
were examined. This included the Wages Fund 
Doctrine, the Residual Claimant Theory, the Prod- 
uctivity Theory, the Marginal Productivity Theory, 
and the Malthusian Theory. In the discussion of 
the Marginal Productivity Theory, it was learned 
that Clark had followed Marx and developed con- 
cepts of labor that are identical with Clark's two con- 
cepts of capital. In other words, we can think of 
labor either in the concrete form of weavers and 
spinners, or as a mobile, homogeneous fund capable of 
taking any shape the entrepreneur may desire. It 
was also shown that the rate of wages, like the rate 
of interest, is determined by the marginal produc- 
tivity of this abstract, mobile, homogeneous fund, or 
by its product in the least productive industry in 
which it will find employment if it retains its free- 
dom of motion. 

Again, it was urged that in dealing with labor as a 
mobile, homogeneous fund we are dealing with normal 
value. If this is true, it follows that we cannot content 
ourselves with the statement that the rate of wages is 
set by the marginal productivity of the mobile fund 
of labor. For the questions arise, What fixes this 
margin ? What determines the supply of labor ? 
Here, again, the answer was found to be that in a 
progressing society the supply of labor is limited by 
the disutility, or abstinence, endured by the marginal 
laborer who abstains from the enjoyment of free and 
other goods that he may continue the hours of his 



312 VALUE AND DISTRIBUTION. 

labor. As interest is a surplus above the cost of 
maintaining the existing supply of capital, so, too, 
there is a like surplus in wages, or a gain of labor, 
which is in excess of the cost of maintaining the 
existing supply of labor. 

In the discussion of the Malthusian theory we 
found a recognition of such a surplus in wages as 
early as the fifth edition of the " Essay on Popula- 
tion." It is there clearly recognized that the exist- 
ence of such a surplus is a primary condition of 
social progress. All this led the present writer to 
j>ropose what he has styled the Normal Value 
Theory of Wages, — a theory that corresponds in all 
essential details to the Normal Value Theory of 
Interest. It was also shown that as the latter theory 
involved an exchange of present for future goods, 
so, too, the Normal Value Theory of Wages in- 
volved a like exchange of present for future goods. 
In other words, they might both be called either 
exchange theories or normal value theories of in- 
terest and wages. 

171. Factors of Production versus Different 
Forms of Surplus. — It has been seen that the ortho- 
dox economists, so far as they gave any thought to 
the problem of distribution, threw the accent upon 
the several factors of production, — land, labor, capi- 
tal, and entrepreneur. For certain purposes it will 
still be well to retain this subdivision. It must, 
however, be remembered that there is another and 
much more important subdivision, — rent, profit, in- 



RESUME. 



313 



terest on capital, and gain of labor. The first sub- 
division is more objective, and so was the first to be 
recognized. The second, though more important, 
does not lie so much on the surface of the phe- 
nomena of distribution. The relation between these 
subdivisions is best shown in the following tabula- 
tion : 



Factors of 


The Three Forms of Surplus. 


Production. 


Differential. 


Marginal. 


Normal. 


Entrepreneur . . . 


Rent. 
Eent. 
Rent. 
Rent. 


Profit. 
Profit. 
Profit. 
Profit. 


Interest. 
Gain. 



It is here seen that rent and profit are surpluses 
that may be secured by all four factors of produc- 
tion, while interest and gain of labor can only be 
secured by those factors that are freely reproducible. 

Again, it should be noted that interest and gain 
are surpluses if we have in mind the maintenance 
of existing conditions. They, however, become a 
part of costs if we have in mind a progressing 
society. It is therefore conceivable that profits might 
disappear and rents be confiscated and yet society 
continue to progress. But it is seriously to be ques- 
tioned whether society can long continue to progress 



* Land here includes all natural forces except labor. 



314 VALUE AND DISTRIBUTION. 

if either interest or gain is eliminated. Here, then, 
we have that ideal of society which socialist writers 
have endeavored to define. The defective analysis 
of the orthodox economists has, however, led them 
astray. In common with these economists, the social- 
ists failed to see that one portion of the earnings of 
capital, like the earnings of labor, is determined 
under conditions of free competition. It must be ad- 
mitted, however, that while progress depends in last 
resort upon the realization of the interest on capital 
and the gain of labor, yet, as a matter of fact, progress 
has in the past been largely dependent upon the 
stimulus of rents and profits. On the other hand, 
it may well be true that society has not only paid 
more in rents and profits than was necessary to se- 
cure the desired progress, but that these overdrafts 
have materially retarded that progress. For after all, 
the only social justification that can be urged for rents 
and profits is that they tend to resolve themselves 
into interest and gain through an advancing standard 
of life. 

It may be objected that we here employ the terms 
rent, profit, interest, and gain in an entirely different 
sense from that sanctioned by common usage, and 
that it would have been better to make use of entirely 
new terms. In reply, I would plead the precedent, 
established by the earlier economists in their de- 
velopment of the doctrine of rent. They saw, of 
course, that the total payment to the landlord is a 
complex return which includes not only a payment 



RESUME. 315 

for the land, but as well a payment for the money in- 
vested in permanent improvements. Having shown 
that the first was determined by a more or less definite 
law, they restricted the term rent to this share of the 
total payment. It is this method of procedure that 
has been followed in the present study. Having 
clearly distinguished three, or, if you like, four, forms 
of surplus, we have availed ourselves of the familiar 
terms rent, profit, interest, and gain by giving them 
a more restricted meaning than that which prevails 
in common practice. But if the employment of these 
or any equally short terms tends to obscure the im- 
portant differences that exist between these several 
surpluses, then let us abandon them and return to the 
more cumbersome terms, the price-determined sur- 
plus, the monopoly price-determining surplus, and 
the normal price-determining surpluses of capital 
and labor. After all, it is far less important what 
terms are employed than that we should clearly dis- 
tinguish these several surpluses in our study of dis- 
tribution. When, for instance, J. S. Mill tells us 
that rent does not enter into the determination of 
price except in the case of scarcity goods, we must 
have our several surpluses so well in hand that we 
clearly recognize that there is here a confusion in 
thought, due to the including of two forms of sur- 
plus, the price-determined and the price-determining, 
or rent and profit under a common term, — rent. 

Again, when Wieser urges that interest is not a 
condition of progress because interest is high in non- 



316 VALUE AND DISTRIBUTION. 

progressing countries like China, it is manifest that 
he has confounded a monopoly surplus with a nor- 
mal surplus or profit with interest by including both 
under a common term, — interest. It is, as I have 
already said, far less important that we should re- 
tain the familiar terms rent, profit, interest, and gain 
than that we should avoid the confusion which results 
from the confounding of these essentially different 
forms of surplus. 

172. An Essentially Different Scheme of Distri- 
bution from that proposed by Clark. — In conclu- 
sion, it may be well to note that the scheme of distri- 
bution which is here proposed differs fundamentally 
from that proposed by J. B. Clark. He writes : 

" The true method of obtaining a law of distribu- 
tion is not, therefore, to eliminate from the earnings 
of society the element of ground-rent and then try 
to find a principle that will account for the remaining 
elements ; it is to eliminate what is not rent — namely, 
pure profit — by reducing society to a static condition 
and then by the use of the rent-law to account for 
all that remains." * In keeping with this he writes : 
" Interest is the rent of the social fund of pure, 
capital. It is a differential gain in the fullest sense of 
the term. It is measured by the Ricardian formula, 
and will bear all the tests to which a rent producer 
can be subjected." f 

* Quarterly Journal of Economics, 1891, page 291. 
f Ibid., page 303. 



RESUME. 317 

As the latest statement of Clark's views upon this 
point are nearly a decade old, and as the first volume 
of his completed book will shortly appear, it is 
hardly in order to attempt any review of this part 
of his work at the present time. It is manifest, how- 
ever, that he here divides the entire social surplus 
into rent and profit. I, on the other hand, have 
recognized three forms of surplus, — the differential, 
the marginal, and the normal ; or rent, profit, and, 
under the normal surplus, interest on capital and 
gain of labor. The source of our disagreement is 
found, I think, in the two competing differential 
concepts, one confined to the single industry and the 
other including the whole range of industry. For 
reasons given in sections 62, 66, and 67, I have fixed 
upon the first, while Clark has taken the second as 
the concept having the greatest economic importance. 
If Clark has not modified his views upon this point, 
it will be in order for the reader to pass upon the 
two schemes of distribution when his work appears. 



THE END. 






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